The following link will take you to a portion of a talk given by Mervyn King, Governor of the Bank of England. The complete talk is below with the portion given on this video highlighter in red. I have inserted some comments in blue.
http://www.youtube.com/watch?v=Mz3VzUz8b_w
Mervyn King: Changes in the UK economy and the role the Bank of England can play in supporting them
Speech by Mr Mervyn King, Governor of the Bank of England, at the Black Country Chamber of Commerce, West Midlands, 19 October 2010.
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Ladies and Gentlemen,
It is good to be back in the heart of Britain – in the Black Country – because the Bank of England has strong connections with the area. Both I and Deputy Governor Paul Tucker hail from Wolverhampton. And I am delighted that all nine members of the Bank’s Monetary Policy Committee are in the West Midlands this week on an MPC road-show to see for themselves the state of business in the region.
The Black Country is the home of the original Industrial Revolution. Too often those historic events are painted as just that – past glories of little relevance today. But there is no better place to see evidence of how the British economy can adapt than in the Black Country. Indeed, one example can be found behind this building. Dudley Canal No. 1 was part of a network of canals, central to the Industrial Revolution, along which the products made here – especially iron and steel – were transported throughout the country. At its peak, there were 5,000 miles of canals in Britain. Of course, the importance of canals as the arteries of industry later declined and by the late 1960s only 2,775 miles were navigable. But the regeneration of urban communities, and the efforts of British Waterways, have reversed this decline. The number of miles is now increasing. Last year, 13 million people visited our canals and the number of boats is actually higher now than during the Industrial Revolution. Such examples are important because our economy faces the prospect of change again. After an unprecedented financial crisis and deep recession, the UK economy needs to rebalance. Tonight I want to talk about what those changes will entail and the role which the Bank of England can play in supporting them.
The Bank of England’s key role has always been to ensure that the economy is supplied with the right quantity of money – neither too much nor too little. For fifty years, my predecessors struggled to prevent there being too much, so leading to inflation. I find myself in the opposite situation having to explain that there is too little money in the economy. But, in the wake of the financial crisis, and the sharp downturn that followed, the amount of money in the economy as a whole – broad money – is now barely growing at all. That is restraining activity and pushing down the outlook for inflation. So the Bank of England has taken extraordinary monetary policy measures – through our so-called "quantitative easing" programme of asset purchases – to ensure that the amount of money starts growing again in order to support a recovery and keep inflation on track to meet our target in the medium term.
My first speech as Governor – in 2003 – was also in the Midlands. In it, I talked about the non-inflationary consistently expansionary – or "nice" – decade from the early 1990s to the early 2000s. I argued that the next decade was unlikely to be as nice because, and I quote, "when shocks, as they will, hit our economy it is almost inevitable that there will be somewhat greater volatility of both output and inflation than the remarkable stability to which we have become used in recent years". I certainly did not anticipate the scale of the downturn in the world economy that followed the collapse of the banking system in 2008. But I did point to the need for a rebalancing of demand in the UK economy because, as I said then, "the strategy which the MPC has pursued in recent years – stimulating domestic demand to compensate for weak external demand in the face of a strong exchange rate – carries the risk that there could be a sharp correction to the level of consumer spending at some point in the future".
The counterpart to strong consumption in the past was low saving. Having averaged close to 20% in the 1960s and 70s, gross national savings fell to just 12% of income in 2009 – the lowest since the War. This was all the more remarkable because one might have expected saving to increase as life expectancy rose. In the coming years, we will have to save more, even though the immediate concern is to ensure a recovery in demand. So the case for rebalancing is even stronger in the wake of the financial crisis and recession that followed the nice decade.
To achieve a rebalancing we need to sell more to, and buy less from, economies overseas.
This is impossible because, like Canada, the USA and others, England no longer manufactures the necessary products to accomplish this; and Mervyn knows this. This means that the necessary rebalancing Mervyn says England needs will not/cannot happen. It cannot and will not happen anywhere. Are you ready for that?
To close the gap between exports and imports, more than half a million jobs will probably need to be created in businesses producing to sell overseas – compensating for fewer employment opportunities serving UK consumers or the public sector.
What Mervyn is saying here is that England must manufacture more then compete with countries like China to sell these product to other countries. This is also what Canada, the USA and every other country must do to avoid economic collapse. Who among you believes that this can happen?
Such an adjustment is unlikely to be smooth. Unless the fall in domestic spending coincides with the necessary increase in net exports, the path for the economy will be bumpy.
The products England will produce will be more expensive than what is currently purchased from China. Therefore domestic spending will/must increase. Again, this will not and cannot happen.
As a result, it is dangerous to become fixated by the precise profile of quarterly growth rates. The sensible approach is to focus on the big picture. And the big picture is that total output is roughly 10% below where it would have been had the crisis not occurred. The conditions are in place to support a rebalancing at home: in particular the past depreciation of sterling will make UK-produced goods more competitive at home and abroad.
Canada is an example of a country that has tried to keep the value of its dollar under the value of the USA. This means that as long as you're a manufacturer of products sold in the USA you win. But if you are a member of he public buying from the USA you lose. A short study will show that this policy serves no country well.
But domestic spending has already fallen before a pickup in net exports. This highlights a key role for monetary policy: smoothing the adjustment process by providing temporary stimulus to demand while the rebalancing takes place, so reducing the risk of inflation falling below the target in the medium term.
Monetary policy always involves controlling inflation by the manipulation of interest rates. Inflation of any amount leads to more debt. Read my post on this at: http://formulafordebt.blogspot.com/2010/11/2-inflation-answers-exponential-growth.html.
The biggest risk to an orderly rebalancing of our economy comes from abroad. Efforts to restore world demand are impeded by the scale of the imbalances in trade, which are beginning to grow again. If the UK and other low-savings countries are to rebalance their economies, demand for their products must increase overseas. Lower domestic demand in the deficit countries must be accompanied by strong growth in domestic demand in the surplus countries if the world economy is not to slow. That will require a change in the strategy of those countries that have built their own policies around export-led growth.
It is impossible, under our present debt based global economy for every country to sell more than they purchase. Someone must lose. Eventually the loss (debt) grows to such an extent that everyone loses. This is where we are today. As Einstein said, "Doing the same thing and expecting different result is insanity." And when it comes to money, each day we demonstrate our insanity.
In searching for a solution, some ask who is to blame. But that misses the point.
Mervyn's asking you not to look for a cause, which is the very financial system he upholds.
Before the crisis, all the main players were rationally pursuing their own perceived self-interest. Policymakers in countries like China wanted to develop via an export-led strategy, and policymakers in the low-saving countries took actions to maintain an adequate level of overall demand, consistent with steady, low inflation. But what seemed to make sense for each player individually did not make sense in aggregate, and we can see the consequences. A key lesson from the crisis is that we must find better ways of ensuring the right collective outcome.
Mervyn just said that the world got to its present situation by following the very policy he's recommending England undertake.
That challenge is clearly visible today. All countries accept that global rebalancing is necessary. But there is a clear difference between the path of adjustment desired by the surplus countries, which are faced with the need for a longer-term structural shift away from reliance on exports, and the path of adjustment preferred by the deficit countries, which are under greater near-term pressure to reduce the burden of debt in both private and public sectors. Tensions between the two groups were evident at last week’s IMF meetings in Washington where all the talk was of currency conflicts. Such conflicts are, however, symptoms of a deeper disagreement on the appropriate time path of real adjustment. Since surpluses and deficits must add to zero for the world as a whole, differences between these desired ex ante adjustment paths are reconciled ex post by changes in the level of world output. And the risk is that unless agreement on a common path of adjustment is reached, conflicting policies will result in an undesirably low level of world output, with all countries worse off as a result.
The international monetary system today has become distorted. The major surplus and deficit countries are pursuing economic strategies that are in direct conflict. And there are some innocent victims. Those emerging market economies which have adopted floating currencies are now suffering from the attempts of other countries to hold down their exchange rates, and are experiencing uncomfortable rates of capital inflows and currency appreciation. So there is more to this issue than a bilateral conflict between China and the United States.
At the G7 meeting in October 2008, I was part of the group of ministers and central bank governors who threw away the prepared communiqué, and replaced it by a bold short statement of our determination to work together. That spirit, so strong then, has ebbed away.
We told you as much in October of 2008, after the G7 meeting. Are you ready for more of the same. The only guaranteed result of the Private Debt Money System that has controlled our economy for the last century is debt and more debt.
P - (P + I) = D or Principal minus (Principal plus Interest) equals Debt was true in 1913, has been true since then and is still true today. See my blog Formula For Debt at: http://formulafordebt.blogspot.com/2010/11/formula-for-debt_09.html
Current exchange rate tensions illustrate the resistance to the relative price changes that are necessary for a successful rebalancing. The need to act in the collective interest has yet to be recognised, and, unless it is, it will be only a matter of time before one or more countries resort to trade protectionism as the only domestic instrument to support a necessary rebalancing. That could, as it did in the 1930s, lead to a disastrous collapse in activity around the world. Every country would suffer ruinous consequences – including our own. But, to borrow a phrase, in order to be tough on protectionism, we need also to be tough on the causes of protectionism.
So what needs to be done? Let me suggest two principles for the way ahead. First, focus discussion on the underlying disagreement about the right speed of adjustment to the real pattern of spending. Without agreement on this, policies will inevitably conflict. Once broad agreement is reached, it should be easier to agree on the instruments of policy. Second, in terms of policy instruments, put on the table many potential policy measures – not just the single issue of exchange rates. That should include, in addition to exchange rates, rules of the game for controlling capital inflows, plans to raise saving in the deficit countries, structural reforms to boost demand in the surplus countries, and even the role and governance of the international financial institutions.
What is needed now is a "grand bargain" among the major players in the world economy. A bargain that recognises the benefits of compromise on the real path of economic adjustment in order to avoid the damaging consequences of a move towards protectionism. Exchange rates will have to be part of such a bargain, but they logically follow a higher level agreement on rebalancing and sustaining a high level of world demand.
A natural forum in which to strike such a bargain is the G20. But to turn the regular round of international meetings into a real agreement will require a revolution, different in nature but no less significant, than that which put the Black Country on the map. Landlocked though the Black Country may be, our local economy has always been linked to a wider world – by canal, rail, road, and air, even fibre-optic cable. So the manner and speed with which the global imbalances unwind will have a direct impact on the Black Country and the UK economy as a whole.
Such developments in the real economy are important also for the Monetary Policy Committee, because they are an important influence on our primary goal of ensuring inflation is on track to meet our 2% inflation target.
Recently, inflation has been high and volatile. It is currently above our 2% target. And the aim of the MPC is to bring it down. But as demand rebalances, we should expect some volatility in inflation as well as in the path of output. During 2008, CPI inflation rose to a peak of 5.2%, fell to a low of 1.1% in 2009, before increasing again to stand at 3.1% now. Those movements have mainly reflected changes in VAT, volatile energy prices and pass-through from the past exchange rate depreciation. Together they have pushed up on measured inflation.
Though uncomfortable, it is not surprising that inflation has been more volatile than during the nice decade. In 1998, before he joined the Bank, Charlie Bean estimated that the normal variation in the economy would lead inflation to be more than 1 percentage point away from target for around 40% of the time. And in the past three years, inflation has been more than 1 percentage point away from target in 17 months, or 47% of the time. Yet that was a period of extraordinary volatility in the economy and at the same time we managed to absorb a 25% fall in sterling’s effective exchange rate, something that historically would have created far more serious inflationary problems.
The key question is whether the current inflation rate signals that inflation will persist above target. The MPC is conscious that the continuing high level of inflation poses the risk that inflation expectations may move up. And it may be some while before inflation returns to target. But at present, there is also a risk – at least as large – that once the temporary upward influences on inflation dissipate, the influence of spare capacity in the economy will push inflation below the target. Consistent with that possibility, a range of other indicators – growth in broad money, pay, and the pressure of demand on supply, that together are likely to be a more reliable guide to inflationary pressure looking ahead – all remain extremely subdued. So not only can monetary policy play a role in smoothing the rebalancing process, it needs to do so if the outlook for inflation is to remain in line with the 2% target in the medium term.
Because there are risks on both sides of the outlook, reasonable people can disagree about the monetary policy judgement. In recent speeches, different MPC members have emphasised upside and downside risks to inflation. After the event, no doubt whichever risk has crystallised will be described by the critics as inevitable. Unfortunately, we do not have a crystal ball. So in setting policy today the only coherent approach is to balance those two risks.
The next decade will not be nice. History suggests that after a financial crisis the hangover lasts for a while. So the next decade is likely to be a sober decade – a decade of savings, orderly budgets, and equitable rebalancing. Our prospects remain closely linked to developments in the rest of the world. But we can influence the outcome, with monetary policy still a potent weapon to ensure that the amount of money in the economy is growing neither too slowly, as in the recent past, nor too quickly so as to reignite inflation. With that, and the inspiration provided by the Black Country’s example of how to adapt to economic change, I am sure of one thing. A sober decade may not be fun but it is necessary for our economic health.
I am sure of one thing. That Mervyn is aware, as I am, that we will not get through the next decade without a depression worse than anything that this world has ever seen. For that I know that you are not ready and I am afraid for you.
A pdf of Mervyns talk can be seen here:http://www.bis.org/review/r101021a.pdf
Comments to the author are welcomed. david.ealing@gmail.com.
Sunday, February 20, 2011
Wednesday, February 9, 2011
Ignorance is not Bliss
Ignorance has been described as bliss. But when it comes to the creation of money it is slavery. Not one person in ten thousand really knows how money enters our economy. Why is so little known of something that exercises so much control over our lives? When you finally understand the truth behind money creation you’ll also understand why you have learned so little about it. If you knew the truth you would be outraged.
About this Henry Ford once said: "It is well that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."
Two possibilities exist here. Either, Mr. Ford was wrong and the people do understand the banking and monetary system, or he was right and the fact that there has been no revolution proves that the people still don’t understand. I’ll go with the latter.
I write this because of our new ferry fiasco in British Columbia. We spend many millions of dollars for needed ferries then park them because they’re too expensive to run. And we pay David Hahn a million dollars a year to do this for us.
[Just as an aside here let me tell you that Mr. David Hahn’s pay comes to him in the form of a compensation package. We’ve all heard that before. CEOs are compensated for what they do. The reason they ask to be compensated is that compensation is not taxable. So David Hahn gets to waste our money and we don’t even get one dollar in tax back from him. Funny, doesn’t the word compensate mean that something had to be lost first. People are compensated because they suffered a loss, aren’t they. Our ignorance is certainly not bliss.]
Let me point out another area of our ignorance. How many of you are aware that our Provincial Governments could print and issue our own money rather than borrow it at interest from a private bank?
You don’t have to believe me but I’d suggest you start learning the facts rather than continuing to believe those who have lied to you for decades. How about a banker? Would you believe a banker if he told you the same thing I’m trying to tell you? Let’s see.
"The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented. Banking was conceived in iniquity and born in sin. Bankers own the earth. Take it away from them, but leave them the power to create money and control credit, and with the flick of a pen, they will create enough money to buy it back again. Take this great power away from the bankers and all the great fortunes like mine will disappear, and they ought to disappear, for this would be a better and happier world to live in. But if you want to continue the slaves of bankers and pay the cost of your own slavery, let them continue to create money and to control credit."
Sir Josiah Stamp: Director and President of the Bank of England during the 1920's and reputed to be the second richest man in England.
Start your education with the following article taken from:
http://members.shaw.ca/theultimatescam/provincialcredit.htm.
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A second option available to the provinces, failing action by the federal Government, is to set up its own mechanism to provide additional credit to British Columbians based upon the wealth of the province. The BNA Act of 1867, our Constitution, Section 92.3, the province is allowed to "borrow on the sole credit of the Province", that is to say, upon the real wealth of the province. A few short years ago, The World Bank published a report in which they estimated the worth of Canada northern territories British Columbia
What is needed in B.C. as well as the other provinces, because they face the same problem, is a Provincial Public Credit System. A mechanism whereby, the province can provide credit within the province of B.C. for its own legislatively approved expenditures, including health, education, highways, bridges, resource development and other concerns. This credit would be interest free and repaid through taxes or user fees to keep the system in balance. The key here is "interest free". Interest charges amount to a growing, significant expenditure for government, business and individuals. These interest expenditures are absolutely unnecessary!
A prime example as to how this can be utilized would be mortgages for principal residences in B.C. The province, through a system of "public" banks or credit unions, can issue "credit"(loans) to British Columbians for the purchase of a principal residence within B.C., interest free! The only necessary charge would be a nominal administration fee to monitor and process payments. (We don't need to borrow from the private banks and pay them interest!!) This single action alone would allow every British Columbian to own their own home within a few short years. No more paying for a home 3,4 or 5 times over because of burdensome interest charges levied by private banks. This single act alone would also free up hundred's of millions of dollars for consumers to spend on other goods and services, creating thousands of new jobs and giving the economy an enormous boost. Another example would be resource development. The province, through a Provincial Credit System can advance credit to companies to develop our natural resources. For example, if we needed to increase our natural gas production, the province can provide the credit needed for the private sector to construct the facility. By charging a nominal rate for the use of the Provincial Credit plus a royalty percentage based on production, the province would earn revenues to repay the credit advance and support some of the other needs of the province. In Alaska
In 1939, the Provincial Government of Alberta under William Aberhart passed a law, which was to provide exactly this. The Alberta Credit House Act was passed with the intention of providing additional credit to Albertans. This is where the network of "Treasury Branches" originated. It was the intention of the Alberta Government to provide interest free credit to Albertans and get away from the debt money system operated by the private banks. Unfortunately, World War ll brought about a suspension of this Provincial Credit System and in 1943, William Aberhart died in a car accident. The Act is still on the books but it has never been implemented.
This system would operate similar to the pictorial example of the Public Credit Money Sink. The only difference would be that the province would create credit and issue it within the province to meet our provinces needs and extinguish the advances (loans) as payments came in. The Provincial Credit Office would extend credit for authorized provincial public and private expenditures. Payments would come back in the form of a regular payment schedule (in the case of credit advances to the private sector for development of provincial natural resources) or through taxes and fees for public services to keep the system in balance.
To summarize, governments at all levels, private industry and the public at large are all under financial pressure. We see, on a daily basis, government cutbacks, budget shortfalls, reduction in services, pressure to either raise taxes or find other means to raise revenue and an increasing public debt which cannot ever be paid back under the present debt money system. Businesses either moving out of province or going under, leaving thousands of our citizens unemployed, unions striking for higher wages and benefits, injured workers fighting for support payments which are harder to come by or are reduced. More and more, wives are forced to work to provide a second income in order for families to survive, husbands are taking on second jobs, part time work or working overtime and weekends just to make ends meet. And on top of all this, personal debt has climbed to an all time high and shows no sign of stopping.
The problems are daunting but not impossible to overcome. But the promises and the remedies offered by past and present governments and politicians will not solve the problems. Provincially, we have the power to make the necessary changes. All that is required is the will to do what must be done. We need to establish our own mechanism for providing credit within the Province. A growing and expanding economy requires a growing and expanding supply of money to meet the needs of society. Under our present system, the banks supply the "money" to meet demand but extract more back in the form of principal and interest payments. This causes the constant shortfall of the money supply in the economy and results in problems such as those referred to above. Under a Provincial Credit System, the supply of "credit" will always be adequate enough to meet the needs of the people and provide for a prosperous future for all of us.
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It’s your choice folks. You can use your own money at no cost or continue to use a private banker’s money that guarantees debt. I would think the choice would be easy.
Check out our present system here:
And what could be our federal system here: http://members.shaw.ca/theultimatescam/pcms.htm.
Comments to the author are welcomed. david.ealing@gmail.com.
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