Tom Arms’ World Review

Pakistan

Pakistan is sliding back into military rule. Actually, it never really left it. The military and its friends in the intelligence services have for decades been the puppet masters pulling the strings of successive nominally democratic governments. Quite often they don’t even bother with the veneer.

Imran Khan knew this. That is why he came to a modus vivendi with the army early in his premiership. Unfortunately for the cricketing star that arrangement did not last. He tired of both the orders and the corruption and decided to be his own man and clear the Augean Stables. Unfortunately he ended up being cleared out himself.

He is now languishing in gaol and barred from elected office. His crime was failing to report an estimated $600,000 in gifts from foreign dignitaries. It is an interesting crime. If properly enforced a large chunk of the Pakistani political establishment would be sharing Imran Khan’s jail cell.

Not satisfied with jailing their opponent, the military have also organised a postponement of elections. Under the Pakistani constitution, elections have to be held within 90 days of the dissolution of parliament. The Pakistani parliament was dissolved on Thursday, but new army-friendly Prime Minister Shebaz Sharif said elections would be “postponed for several months”. This was ostensibly because the electoral commission needed time to re-draw constituency boundaries following the acceptance of a census report just last week.

But before dissolution, the government did manage to rush through two bills increasing the powers of Pakistan’s omnipresent intelligence agencies. They can now search and arrest anyone they suspect of a “breach of official secrets”. Furthermore, anyone who reveals the identity of an intelligence agent will now be automatically sentenced to three years in prison.

Possibly in anticipation of this new law, 157 Pakistani political activists “disappeared” last month.

History control

George Orwell famously wrote in his book “1984”: “Who controls the past controls the future.”

The words are profound, wise, correct and often followed. Which is why we have two examples of history control this week. The first, perhaps not surprisingly, is out of Moscow. Vladimir Putin’s educationalists have rushed through a new secondary school textbook aimed at “educating” 16-18-year olds about the Ukrainian political facts of life.

The new “patriotic curriculum” declares that Ukraine is an “artificial state.” Russia launched its “special military operation” as part of a programme of “denazification and demilitarisation.” The goal of the West is to “destabilise Russia” and Moscow is “a victim of Western aggression and fighting for its very existence.”

On the other side of the world, in the sunshine state of Florida, we have another attempt to control the political debate through teaching. There the target is wokeism. To battle it, presidential hopeful Ron de Santis has employed the skills of Prager University to produce a series of history online and off-line videos.

Prager University is not a university. It is a conservative video production company run by conservative radio talk show host Dennis Prager with the avowed intent of spreading conservative values to counter the “evil liberal elitist values” of most American universities. Its videos are completely unaccredited and disavowed by most serious educationalists.

Presenters and guests for Prager U videos have included Tucker Carlson, Nigel Farage and George Will. According to Prager U videos words such as racism, bigotry, homophobia and Islamophobia “are meaningless buzzwords.” Fossil fuels are “the greenest energy.” There is no “gender pay gap” and the White race “is under attack.”

Thousands of local education authorities already use Prager U videos in their classrooms, but Florida is the first state to adopt them. They are unlikely to be the last. Texas, Louisiana and Mississippi are expected to soon follow suit.

Politicians worry constantly about their legacy. Perhaps Ron de Santis and Vladimir Putin are thinking along the same lines as Winston Churchill who said: “History will be kind to me for I intend to write it.”

Banking

Ever since 2008-2009 the public have hated bankers. They weren’t overly-fond of them before the financial crash. Which explains why the populist Italian government of Giorgia Meloni has curried public favour by imposing a swingeing 40 percent windfall tax on her country’s banks.

Since 2009, the public has reluctantly gone along with the idea that banks need to make money. But not too much. They want bankers to concentrate more on service and less on champagne at lunchtime. The problem is that sometimes external hard-to-control factors can cause violent swings up and down the balance sheet, mostly fuelled by changes in interest rates.

The bursting of the mortgage bubble, and low inflation followed by covid kept interest rates at historic lows for a long time. The banks made smaller but satisfactory profits and the public were happier, unless they were savers.

Then came the Ukraine War, the energy crisis, high inflation and the attempt by the world’s central banks to control inflation by raising interest banks. If the central bank rates increase then so do the rates charged to borrowers by the commercial banks. And at the moment a large number in Italy and elsewhere who borrowed money at two percent less are paying six percent interest on the same principal. This means that bank profits are going through the roof. To use the example of Italy’s largest bank, Inter San Paolo, its profits have doubled in just one quarter.

The avaricious eye of Ms Meloni is causing disturbing ripples throughout the European banking industry. Italy’s banks are big players.  Inter San Paolo has $1 trillion in assets and operates in 12 European countries and 25 others.

Italy was the only target of windfall taxes, the banks would not be so worried. But Hungary, Spain, Lithuania and Estonia have also introduced smaller—but still significant—windfall taxes on their banks. The fear is that the contagion could become EU-wide and affect the bigger financial institutions in Germany, France, the Netherlands and possibly wider afield.

Ireland

The Irish government has no need of any windfall taxes. Its problem – if it is a problem – is that it has too much money. The government has a budget surplus this year of $65 billion. This means $12,000 this year alone could be handed over to every one of Ireland’s five million citizens.

It won’t be. Taoiseach Leo Varadkar intends to use the money to spend on building up the infrastructure and paying off the government’s debts. Infrastructure will quite likely be focused on housing. Dublin in particular has an acute housing shortage with prices and rents beyond the means of many Irish young people.

But where does the money come from? Surely the five million inhabitants have not coughed up $12,000 each. The answer is Big Tech. Apple, Google, Meta and X (formerly Twitter) among others have all based their global headquarters at Dublin’s “Silicon Docks.” Twenty-five percent of Ireland’s tax revenues are corporate.

Ireland is English-speaking, friendly, part of the world’s largest trading bloc and – most important of all – levies a tiny 12 percent of corporate tax while the rest of the EU averages 30 percent and the US ranges from 21 to 32 percent. Ireland has gambled on quality over quantity and it has paid off big time.

But wealth creates problems as well as opportunities. One problem is resentment from fellow Europeans. France and Germany especially are pressing for an EU-wide corporate tax of at least 25 percent. Another problem is political.

Debates on how to spend the money are likely to be divisive at a crucial period in Irish politics. For the first time in history Fine Gael and Fianna Fail have buried their long-standing differences to form a coalition with the Green Party. This is because of the perceived need to keep out of government the now second largest party in the Republic of Ireland – the politically suspect ultra-nationalist Sinn Fein.

At the moment Sinn Fein is leading in the opinion polls and preparing to exploit spending plans for the surplus to drive a wedge between the coalition partners and force a new election. If they win they will call for a referendum on unification with Northern Ireland which will create a whole new set of problems for Ireland, Northern Ireland, Britain, the US and the EU.

* Tom Arms is foreign editor of Liberal Democrat Voice and author of “The Encyclopedia of the War” and the recently published “America Made in Britain". He has a weekly podcast, Transatlantic Riff.

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26 Comments

  • Prime Minister Shebaz Sharif has come a long way since his sojourn in London after being let out of jail in Pakistan, where he was serving a sentence for corruption, for medical treatment.
    Several of the Sharif family have been mired in corruption allegations. A report by the Daily Mail has claimed that Shahbaz Sharif and his family were involved in money laundering in Britain Sharif family laundered quake victims’ aid money to UK: report. However, a subsequent UK crime agency report found no evidence of corruption, money laundering or criminal activities against Shahbaz Sharif Uk court issues order to unfreeze Shahbaz Sharif familys bank accounts
    It would be no surprise to see Pakistan’s educationalists emulating Russia in preparing a new secondary school textbook aimed at “educating” 16-18-year olds about Pakistan’s political facts of life.

  • Italy’s windfall tax on banks is not too dissimilar to Ed Davey’s call for a £3bn emergency mortgage protection fund to protect people who would otherwise be repossessed Liberal Democrats: emergency mortgage protection fund needed
    Ireland’s €65 billion budget surpluses are expected in the four years up to 2026.The surplus projected for this year is €10 billion and next year is €16 billion. Ireland’ budget surplus may not be sustainable in the face of global headwinds and comes at a time when Ireland is experiencing a cost of living crisis and growing homelessness problem. The Irish Times explores some of the options available to Ireland How to spend the €65bn budget surplus: Four options from safe to risky
    Ireland had big budget surpluses prior to the 2008 financial crisis followed by a long period of large deficits.
    With China teetering on the brink of a property crash and deflation and many American economists expecting a major US stock market downward correction the outlook for the global economy is highly uncertain. Ireland collects a lot of corporation tax from capital flows generated by the US tech companies based in Dublin’s financial centre booking their International profits there Let’s hope we don’t see a repeat of the debt and banking crisis that Ireland experienced in 2008. PS: Ireland inflation rate is still 5.8% but coming down Irish inflation falls to 18-month low of 5.8% as cost of basic items drops and the unemployment rate is 4.1%.

  • Thanks Joe for useful additional info.

  • >” high inflation and the attempt by the world’s central banks to control inflation by raising interest banks.”
    But we didn’t have high inflation, the BoE admitted as much, their initial strategy was to prevent inflation taking hold…

    If anything the raising of interest rates by the banks out of proportion to what the BoE increase would actually cost them, can be seen as a blatant profit grab, the evidence for this can be found in the financial reports the banks have made this past year.

  • Apple, Google, Meta and X (formerly Twitter) among others have all based their global headquarters at Dublin’s “Silicon Docks.”

    European headquarters.

    Ireland is English-speaking, friendly, part of the world’s largest trading bloc…

    Third largest:

    RCEP $29.6T
    USMCA $26.6T
    EU $17.2T
    CPTPP $14.8T
    AfCFTA $2.7T
    Mercosur $2.2T

    60% of Ireland’s trade (imports and exports) is outside the EU.

    …and – most important of all – levies a tiny 12 percent of corporate tax while the rest of the EU averages 30 percent…

    12.5%, but not directly comparable as countries with higher headline rates often have more generous capital allowances; hence Ireland is most attractive for service businesses. Until recently, the main incentive for multinationals was the relative ease of setting up advantageous tax arrangements, such as the ‘Double Irish’, that enabled dividends to be paid tax-free to offshore tax havens like Bermuda.

    Ireland has gambled on quality over quantity and it has paid off big time.

    Hardly a gamble. Low taxes that attract investment are a well proven path to prosperity.

    France and Germany especially are pressing for an EU-wide corporate tax of at least 25 percent.

    Such a demonstration of their loss of sovereignty may increase calls for Irexit. Online (unscientific) polling suggests that Ireland’s EU membership no longer has the support it once did…

    NewstalkFM:
    https://twitter.com/NewstalkFM/status/1655942493375205385

    On this week’s Common Ground on @TheHardShoulder we ask: Is it good to be part of the European Union?

    Yes: 28%, No: 72%

  • Jeff,

    Ireland is firmly on board with EU membership as a poll commissioned in 2021 confirmed IRELAND AND THE EU 2021. There are some tensions around immigration and 9% of respondents to the poll did not agree Ireland should remain a member of the EU against 84% who did agree.
    When asked if now is the time to hold a Conference on the Future of Europe to reform the EU, even if it results in a referendum in Ireland – 52% agree, 28% disagree,
    On the question of whether there should be more political and economic integration in the EU, even if this means that Member States lose control over economic policy, e.g. tax = 52% disagree, 29% agree.
    The Irish government has supported a deal to set a global minimum corporation tax rate for large firms. It means the country increasing its 12.5% rate to 15% for firms with a turnover of more than €750m (£636m). Smaller businesses will still be taxed at the 12.5% rate.
    “Ireland is a prosperous country, but not as prosperous as is often thought because of the inappropriate use of misleading, albeit conventional statistics. There is less consumption per capita than in the United Kingdom, and on this metric Ireland is closer to New Zealand, Israel and Italy, than to the United States, Switzerland or Norway (which is where a GDP comparison would put Ireland). The same conclusion is drawn if GDP is replaced with the Ireland-specific Gross National Income indicator. Using GDP as a measure can mislead analysis of such matters as debt, carbon-intensity and inequality” Is Ireland really the most prosperous country in Europe?

  • Peter Martin 15th Aug '23 - 4:03pm

    @ Jeff, Joe

    Ireland is stuck in the eurozone so it would be virtually impossible for it to leave the EU. If I lived there I’d probably be against the idea of trying to leave too. The costs in both political and economic terms would be too great.

    Yanis Varoufakis puts it very well when he compares the eurozone to the ‘Hotel California’. You can check out but you can never leave.

  • Yanis Varoufakis has a new plan. “Dimitra” is his radical new proposal for the Greek economy. The plan would allow Greeks to make payments outside the banking system without being charged hefty fees.
    He insists Dimitra is not an alternative currency, but rather an alternative platform for transactions. The reason for creating such a mechanism would not only be to avoid bank fees, but also to have another tool available should capital controls ever be reintroduced.
    Economists say that the only way transactions could be processed would be through digital wallets. But there is still no such thing as a “digital euro”. So for these wallets to contain euros, they would need to be held at a Greek bank. Otherwise wallets would need to hold “euro equivalents” which could be accepted as legal tender for domestic transactions. But that means creating a parallel currency system, where a form of IOU, backed by the government, would be traded within the Greek economy.”
    Parallel currencies or preparing for an exit from the euro seems beside the point at a time when Greece is one of the fastest-growing economies in the eurozone GREECE’S ECONOMIC TURNAROUND

  • Roland,

    I am not sure I follow your reasoning , Tom wrote “Then came the Ukraine War, the energy crisis, high inflation and the attempt by the world’s central banks to control inflation by raising interest [rates]”.
    UK inflation has been significantly above 2% since August 2021 and remains so today. It was running at 6.2% just before Russia’s invasion of Ukraine. Inflation rises to 6.2% in February 2022
    The BofE began raising the bank rate in December 2021 and has increased rates at 14 consecutive meetings, taking the base rate from 0.1% to 5.25%, which is the highest level in over 15 years. You are of course right about the banks making bumper profits. We should be taxing and redistributing these windfall profits.
    The ultra-low interest rates we have seen since the financial crash has caused a lot of problems for working people and pensioners alike. Edward Chancellor’s book The Price of Time includes the following quotes:
    “over the last few decades, we have been conducting a large-scale social experiment with ultralow savings rates, without a strong safety net beneath the high-wire act.”
    “The zero interest-rate policy broke the social contract for generations of hardworking Americans who saved for retirement, only to find their savings are not nearly enough.”
    “An increasing number of Americans were forced to work beyond the traditional retirement age. For younger workers, the dream of enjoying a comfortable old age would remain a dream — another illusion of wealth. Pensioners faced the prospect of their nest eggs running out.” The Price of Time

  • Peter Martin 15th Aug '23 - 9:42pm

    @ Joe,

    The Greek economy is heavily tourist dependent. This crashed in 2020 and 2021 and has recovered this year and last. So naturally the recovery artificially inflates the year on year growth figure.

    A look over a longer period tells the true picture. Hardly any growth for the Greek economy in the last 20 years and a GDP which is still down by 30% from the pre GFC peak.

  • This is what Yanis Varoufakis “Dimitra” is based on A Central Bank Cryptocurrency to Democratize Money
    “The history of money has been the history of the struggles to control the payment system and the money tree. Today, with control over both resting in the hands of bankers, central banks’ efforts to boost business end up amplifying inequality while failing to address either economic stagnation or the looming climate disaster. The time for ending this scandalous cartel is now; the way to do it is by creating a central-bank cryptocurrency.”
    “Society’s reliance on banks for its payments system has meant that since 2008 – and more so during the pandemic – central-bank money has been showered, via private bankers, on the ultra-rich, while everyone else suffers stagnation and austerity. Once caught in this trap, it became impossible for central banks to revive the economy while keeping financiers on a leash. To escape, it is necessary, though insufficient, to end bankers’ dual monopoly of the payment system and the money tree”
    “The first step is to separate payments from the bankers’ money tree. The second step will be to end socialism for the ultra-rich, also known as quantitative easing, Who controls transactions, interest rates, and money creation controls politics. That’s why the powers-that-be will fight this proposal tooth and nail.”

  • Joe Bourke 15th Aug ’23 – 12:55pm:
    …9% of respondents to the [2021] poll did not agree Ireland should remain a member of the EU against 84% who did agree.

    That’s down from 93% in 2019. These polls are commissioned by European Movement Ireland so likely intended to influence opinion rather than accurately measure it. As with most polls they don’t indicate how strongly an opinion is held. There are signs, such as the Newstalk poll I cited above and rising opposition expressed in online forums, that support for EU membership may be ‘hollowing out’.

    The Irish government has supported a deal to set a global minimum corporation tax rate for large firms.

    It’s now an EU Directive so they no longer have a choice. The Irish government’s ‘support’ seems not dissimilar to that of an Italian bar owner’s ’support’ for paying pizzo to the local Camorra.

    ‘Minister for Finance Paschal Donohoe has said he is ‘committed’ to retaining Ireland’s low 12.5% corporate tax rate in the face of intense international pressure’ [July 2021]:
    https://extra.ie/2021/07/15/business/paschal-donohoe-committed-corporate-tax

    Mr Donohoe said the low corporate tax rate has been a key feature of Irish economic policy for decades, adding that he was ‘so committed’ to the 12.5% rate that he could not enter into the agreement.

    ‘Ireland set to avoid implementing 15% headline corporate tax rate’ [March 2023]:
    https://www.irishtimes.com/business/economy/2023/03/28/ireland-set-to-avoid-implementing-15-headline-corporate-tax-rate/

    Government considering a top-up tax…

  • Peter Martin 16th Aug '23 - 8:56am

    @ Joe,

    Yanis Varoufakis has always recognised that the introduction of the EU common currency was about far more than removing the inconvenience of having to change currencies at national borders. It was a way of reducing the power of the National Central Banks and centralising it in a European Central Bank. It is the ECB which now controls interest rates throughout the eurozone. The term NCB is now a misnomer.

    YV has always been looking for ways to reduce concentration of monetary power in the eurozone. If LibDems are as decentralist as they like to claim it is a project they might look more favourably on. I doubt it will change things much because it can’t work without at least some co-operation from the ECB. If the EU/ECB feel it is taking their power away they will act to prevent that happening.

  • Peter Martin 16th Aug '23 - 9:44am

    @ Joe,

    Roland is right. The banks have opportunistically used the tightening of monetary policy to boost their own profits. We all know the mainstream theory that a rise in interest rates discourages borrowing. The banks are happy enough to play their part in this by charging us all more when we do borrow.

    However, we don’t hear quite as much about the other aspect which is that a rise in interest rates encourages savings. The banks aren’t happy with this because it costs them money which they’d rather hang on to for themselves. The interest offered in deposit accounts has hardly increased at all in the last few years.

    So, insofar as monetary tightening can be said to work, which I doubt, it is only half working because there’s nowhere near as much encouragement for us to save as there should be. Consequently the BoE is raising interest rates to higher levels than they need be to try to compensate.

  • YouGov this week: Rejoin EU 63%, Stay Out 37%, within this 13% do not know. It is getting to the stage where re-joining could become an election issue helpful to a party that plays it shrewdly, unlike our effort in 2019.

  • Peter Martin 15th Aug ’23 – 4:03pm:
    Ireland is stuck in the eurozone so it would be virtually impossible for it to leave the EU.

    Of all the eurozone countries, Ireland would likely have the least difficulty. Their proposed sovereign wealth fund could back any new currency; a new Punt might even appreciate against the euro. They already do the majority of their trade outside the EU; a percentage which will grow as that’s where almost all growth in world GDP is projected to be. The average EU member (which includes Ireland) only sends a third of its exports outside the EU. The savings on EU membership payments and the ability to make their own trade deals would more than offset the loss of a few multinationals relocating their tax points to the EU. Ireland is now one of the highest per capita contributors to the EU budget. The main challenge (as with the UK) would be the years of uncertainty and political wrangling while the transition was made; the EU might not be willing to agree tariff free trade as they did for the UK.

    However, I expect a lot of water will flow under Ha’penny Bridge before a potential Irexit is politically realistic. I was merely pointing out that it was perhaps unwise for the EU to attempt to dictate Ireland’s tax rates. It would add yet another log to the growing fire of resentment against EU policy.

  • Latest YouGov poll this week:
    Stay out of EU 37%
    Rejoin EU 63%
    We need to play this clever not Gung Ho like 2019 but the tide is clearly in favour of rejoining, second such poll within a week.
    Will the country rejoin?

  • Banks do not actually need savers deposits to make loans. The reason they compete for deposits is it is the cheapest cost of finance for them and they are quite happy for savers to keep their accounts with them. Challenger banks offer higher rates for savers wiling to lock-in savings for longer periods, but the 5 big banks have the lion’s share of the market and offer minimal rates.
    When a bank makes a loan, in most cases, borrowers use their new deposits to make payments to another bank. For the bank that made the loan, this means a reduction in its reserves at the central bank. The bank needs to replenish its deposits with the central bank and is normally done by borrowing from other banks on the money market or directly from the central bank, unless it can attract large swathes of deposits from other banks by offering better deals to savers. In the case of an interbank loan the interest rate on this borrowing is close to the central bank’s policy rate. In the case of central bank refinancing it is equal to the policy rate.
    Demand for loans typically depends negatively on the interest rate on bank loans and positively on the level of economic activity. However, mortgage approvals and remortgages have actually been rising despite the swingeing increases in interest rates. This is put down to a scramble to secure home loan deals before an expected surge in interest rates increasing bank profits all the while UK mortgage approvals rise despite surge in borrowing rates. Hence the calls for a windfall tax.

  • Peter Martin 16th Aug '23 - 2:03pm

    @ Joe,

    “Banks do not actually need savers deposits to make loans”

    When I read this, my first thought was that someone had lent you an MMT textbook! It is quite true IMO.

    However, it is also true they do need those cheap deposits to make the profits they do. Even if the control of the economy via monetary policy is persevered with, there needs to be some way of ensuring that demand in the wider economy isn’t reduced simply by transferring money from hard pressed borrowers to far less hard pressed banks. Ordinary savers need to be given their fair share too. We cannot trust commercial banks to do this voluntarily.

    This transfer is in no way reducing the “money supply”. It is taking it from those who need it more, and giving it to those who need it less, as you yourself acknowledge, and so make it less liable to be spent.

  • Yanis Varoufakis seems to advocate some MMT like policies A Progressive Monetary Policy Is the Only Alternative
    “instead of ending QE, the money it produces should be diverted away from commercial banks and their corporate clients (which have spent most of the money on share buybacks). This money should fund a basic income and the green transition (via public investment banks like the World Bank and the European Investment Bank). And this form of QE will not prove inflationary if the basic income of the upper middle class and above is taxed more heavily, and if green investment begins to produce the green energy and goods that humanity needs.” (NB: This is not QE it is straight forward tax redistribution and fiscal policy).
    He supports increasing interest rates “Interest rates should indeed be raised. Lest we forget, even in times of zero official interest rates, the bottom 50% of the income distribution are ineligible for cheap credit and end up borrowing at usurious rates via payday loans, credit cards, and unsecured private loans. It is only the rich that benefit from ultra-low interest rates. As for governments, while low official interest rates allow them to roll over their debt cheaply, their fiscal constraints seem impossible to loosen, so much so that public investment is constantly lacking. For these two reasons, 13 years of ultra-low interest rates have contributed to massive inequality”.
    This rising inequality has enlarged the savings glut, as the ultra-rich find it hard to spend their mountainous stash. Because burgeoning savings represent the supply of money, whereas puny investments represent the demand for it, the result is downward pressure on the price of money, which keeps interest rates pinned to their lower zero bound. Central banks must, therefore, muster the courage to raise interest rates in order to break this vicious cycle of unbearable inequality and unnecessary stagnation.”

  • Peter Martin 16th Aug '23 - 7:26pm

    @ Joe,

    Interest rates were relatively low in the UK right up until Margaret Thatcher came into power in 1979. I don’t remember anyone then saying that interest rates should be increased to help out the poorer 50% of the population. When Mrs Thatcher did increase them to 17% (I think?) it was the poor who suffered the most. This was generally accepted by most Liberals at the time too.

    So a strange argument from Yanis Varoufakis.

    Problems arise more from too many variations in interest rates rather than their absolute level. When rates are lowered it is a signal to those who are able to borrow and spend, to do as much as they can to benefit from the resultant rise in asset prices. When rates are increased those who have genuine need to own an asset – like buying or renting a bigger house because they actually need more space for a growing family (remember when that used to happen?) – have the most difficulties.

    I wouldn’t go as far as saying interest rates should never be varied but we should decide what level of interest rates we wish to have over the longer term and use means other than constantly fiddling around with them to try to regulate aggregate demand.

  • The UK base interest remained constant at 5% for a century from 1720 to 1820 and then fluctuated by around 2.5% up or down from from that level until the inflation of the mid-1970s took hold UK Interest Rate History. Interest rates peaked again to 15% at the beginning of the 1990s when the UK was trying to keep the value of Pound fixed in the ERM and reduce inflation from the Lawson boom. From the mid 90s rates returned to fluctuating within a few % points of 5% until the 2008 banking crisis when the bank rate was reduced close to zero It was already very low in the USA)
    Willian Bernstein in his book The Price of Time writes “Interest rates haven’t simply fallen—they were pushed. And by their pushing, the world’s central banks have constructed the hall of mirrors in which every investor has become, of necessity, a speculator”.
    My view is that the BofE mandate should be changed now to Nominal GDP targeting. The Bank of England would stop trying to target price rises, and instead try to target the total amount of nominal spending that takes place in the economy at sustainable levels as the New Stateman argues Is anybody running the Bank of England?
    “The remit of the Bank needs to change: economic growth, employment and equality all need to be given greater consideration. Inflation targeting should be replaced with nominal GDP targeting, allowing the Bank to tackle high inflation without hindering economic growth”.

  • Peter Martin 17th Aug '23 - 8:39am

    @ Joe,

    What’s the difference between targeting inflation and ensuring “spending that takes place in the economy at sustainable levels”? If spending is too low we have recession. If it’s too high we have inflation.

    The BoE has a role to play in the running of the economy but employment, equality, inflation, growth etc are primarily political issues and are primarily matters for government rather than a central bank.

  • Peter Martin,

    this Guardian article discusses the potential benefits of nominal gdp targeting versus inflation targeting as a monetary policy objective Is it time for nominal GDP targets?
    ” If spending is too low we have recession. If it’s too high we have inflation.” if this were true then stagflation would be impossible.

  • Peter Martin 17th Aug '23 - 3:33pm

    Any type of targeting would make more sense if it used at least a combination of monetary and fiscal policy. I’d place more emphasis on the latter. The problem in the past is that we’ve had governments who’ve wanted to run too tight fiscal policies and then the central banks have tried to compensate by making monetary policies too loose. This led to the ultra low interest rates you were complaining about.

    Then Covid and the Ukraine war came along.

    A supply shock such as we had with Covid and/or the Ukraine war and/or any other factor you want to include will mean rising prices. If there is a shortage of apples their price will rise. We don’t call that inflation. If there is as shortage of oil or gas then their price will rise too. These prices rises cause most other prices to rise. We do call that inflation.

    It’s not necessarily a sign that the economy is running too hot though which is why it’s sometimes called stagflation. We inevitably see a class conflict develop over the question of who is going to pay the price. In Marxist terms, the ruling class wants the working class to pay in term of lower wages, higher prices including higher rents and higher mortgage costs. Whereas they want the value of money protected by pushing up interest rates.

    None of this changes the fundamentals though. Too little spending equals too much recession and unemployment. Too much spending creates more inflation.

  • Peter Hirst 20th Aug '23 - 2:33pm

    History is based on facts and opinions. The two need to be clearly distinguished. Dates and results are usually factual. Much else is less so. When it comes to causal relations these are usually fictional. Some things becomes clearer with time, others murkier.

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