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I agree with most of the commentary, particularly the sentiment around trying to separately manage asset prices (although there are steps that can be taken i.e. limiting the multiple of earnings re lending - which I was saying 30 years ago!). Ostensibly, Trichet calls it correctly, however, what I find a little naïve, is the presumption that people will wholly base their wage claims on CPI. The common working man will see double digit increases in fuel, food and mortgage payments and be significantly worse off now than he was 6 months ago. Do you think that even if CPI is 3%, generally, people will be satisfied with 3% - I don’t think so! The coming few months will reveal the answer!

Why didn't you ask him why he acted to provide liquidity or as you prefer to call it taxpayers money when the wholesale markets dried up last year.

I read on Saturday that analysts are now predicting the final figure lent to banks under the Bank of England special liquidity scheme is going to be £750 billion.

As chief protagonist in the lynching of Northern Rock, I was expecting an article today from you calculating how much this was for every tax payer in Britain.

This is only what any financially astute person without any real vested interest in maintaining the status quo has been saying for several months now. I grant you that there are not many financially astute persons who do not have a vested interest. Most bankers are in it up to their necks, and have lent on the basis of perfect security, and most borrowers have borrowed on that basis too. How many individuals are personally at risk from a fall in value from their investments? This has gone on far too long, and needs to be reined in. But what political master is prepared to tell his public that the bubbles has been pricked? Not Mr Brown, for sure.

M. Trichet speaks much sense in identifying inflation and particularly oil price as prime economic threat.

High oil prices ought to be less of a threat to UK because of three advantages:
1. We have in Shell and BP two of the largest players that profit from oil price.
2. Though no longer self-sufficient we stll have significant indigenous supplies.
3. Distances between our producing and consuming population centres are short so transport costs should be less.

Set against these advantages are two self-inflicted causes of imported inflation:
1. Currency devaluation due to BOE pandering to demands for low interest rates to protect already overblown property prices is increasing import costs.
2. Road transport fuel (diesel) prices kept high by a combination of tax policy and lack of investment in refining capacity by our oil majors - leading to inneccessary imports and much higher transport prices than our competitors.

Solutions. Up the interest rates and suffer the price corrections and short term unemployment. Government to press oil majors to invest in UK refining industry (thus creating jobs and reducing imports).

Trichet and others have warned about unsustainable asset price rises, but seem to believe they cannot be controlled.

Do we not employ regulators to ensure that those lending the funds that allow the funding of the purchase of the assets,is properly risk assessed?

Sloppy,hands off regulation, over several years, seems to be a cause for serious concern.

First off: It is false to say that unemployment was not high before the oil shock, in the UK it had already hit about a 40 year high at the time, at around 4%.

Secondly: Any links to the 73-74 oil shock needs to be treated with a huge dose of salt. Inflation and sluggish growth, plus rising structural unemployment, were all key features of the industrialised economies before the oil shock took hold. The oil shock in 73-74 added to already existing stagflationary tendencies and it was created by a fear of supply shortages and the world running out of oil.

The current rise in energy prices is due to opposite issues. Its primary driver is excess demand not fears of declining supply that trigger hoarding. Rather than patchy global growth and increasing reliance upon structurally challenged industrialised economies facing rising unemployment and fading demand, the commodity price boom is occuring on the back of an unprecedented increase in the global growth potential of the world economy from rapid emerging economy developments that are long term and rational. Supply is only temporarily constrained, and unlike the 70s there is no fear that the world is running out of oil. Oil exploration and oil finds are rising sharply, tar sands is a massive boom, and record oil finds abound in Brazil and Kazakhstan etc, etc. Instead, it is the sudden surge in the structural demand position of the world economy that is driving the present energy price boom. This difference to the 1973-4 business cycle means that comparisons are fruitless.

Jean-Claude Trichet can say things the Mervyn King cannot. M. Trichet will not be sacked for expressing his thoughts whereas Mr. King will be. It is all about politics.

It have never been fashionable to let the people actually know what the people in power actually think, just witness the embarrassment caused when a junior minister let the cat out of the bag about house price expectations. And I do wonder if the 'clear plastic folder' incident was deliberate and in fact the 'true' opinion of the powers of the state actually is that the 30% drop in house prices is the most likely outcome and this was a way of preparing the ground.

The absurdity of compartmentalizing inflation to 'good' and 'bad' was always a nonsense. Bad inflation allowed the workers pay to be kept down. Whilst 'good' inflation allowed property owners to grow rich.

If we had kept up controls on money supply and credit as we did in the past we would not be where we are today, but we are and M. Trichet is simply expressing a moderates hope for a good outcome - things may turn out much worse, in particular for countries and individuals who have become highly geared (over borrowed).

> one of the causes of the credit crunch was
> the rapid and unsustainable rise in asset
> prices, especially property prices, in the
> preceding two or three years.

Yes - while Gordon Brown was chancellor.
All that talk about being "prudent" was
hogwash, it seems. It’s reminiscent of the
story of King Alfred. All Alfred had to do
was to mind the cakes cooking on the fire.
But he let his thoughts wander and the
cakes burned.

So we’ll all give Gordon got a good scolding
at the next election. But let’s look at the
lessons learned from this. It’s no use telling
us about the imprudent running of the
country’s finances _after_ the disaster. We
need wise reporters like you to alert us to
these things long _before_ it all goes pear
shaped. In this case, Gordon failed to
include asset price bubbles in his
consideration of the economy, and his legacy lies in tatters.

As post #1 observes, CPI/HICP does not quite fit the UK economy.

THere is now a worrying divergence between CPI/HICP and the old MPC target index of RPIX.

Time, methinks, to reinstate the old goalposts for domestic policy and to h*ll with EuroStandards!

We can always keep generating CPI/HICP for the Euroreports nobody reads anyway. . .

As I understand it, the sole remit of the MPC is to contain inflation within narrowly defined bands. The only tool in the hands of the MPC is to set interest rates.

Why, then, would any member of the MPC vote for a rate cut, presumably for several months in succession, knowing that inflation was already seriously above target and certain to remain so for the foreseeable future? Are these members aware of some new 'law' of economics that will lead to a reduction in inflation through a boost to consumption?

Do they think that a cut in interest rates will increase the value of sterling and therefore ease imported inflationary pressures?

What the motives of those who advocated interest rate cuts, and, more importantly, have they read and understood the MPC's remit?

It is instructive how quickly the revising or re-assesing of reputations can come about these days---the comments of M TRichet and Mr King seem to be.at least in part, implicit criticisms of the Alan Greenspan approach during the dot-com bubble bursting.

By "substituting" another asset for the equities then crashing...mainly property and mainly domestic property, the target of choice for cheap credit given the tax breaks ...arguably Mr Greenspan replaced the dot com bubble with an even larger one that has led to the 'unprecedented' situation in the Banking world.
This is now threatening to leak out iacross the "real economy"---whatever that means.

But how unprecendented this situation actually is ought to be open to question--- IN a book about a previous generation of American financiers the effects of a liquidity crisis leaking out into the real economy and triggering cascading problems seems fairly well understood ---and that was in Pittsburgh back in 1873

If the government are faced with a choice between doing what is best for the economy in the long term and what will support asset prices in the short term, I think I can guess which option they will choose.

Labour have already taken steps to try to prop up house prices and 'encourage first time buyers'.

All they care about is buying a bit of time before the brown stuff hits the fan.

I expect that interest rates will drop further, and inflation to increase.

British interest rates do not affect Global commodity prices.

Commodity Prices are in the main defined by the bids made in a global market place in which British demand is a small part.

Interest Rates have a relativistic effect on currency's depending on the differential between National Interest rates.

So raising interest rates or lowering them do not necessarily change the value of the currency.

It depends on what the other countries have done.

Business confidence is more important.

Currencies that are perceived to be strong attract inward investment that contributes to their strength.

Lack of confidence reduces a currency's strength as investors sell out the currency.

High interest rates can undermine confidence as Investors wonder why the differential is so high when compared to other country's.

End result, a strong economy remains strong a weak economy (manufacturing wise) is prone to crisis of confidence, and remains weak...

Enjoy.

Robbing hood wrote; 'Why, then, would any member of the MPC vote for a rate cut, presumably for several months in succession, knowing that inflation was already seriously above target and certain to remain so for the foreseeable future?'

I think this is because they were caught between a rock and a hard place - they know our economy is based on 2 factors;

1. the 'feel good' factor of double digit house price inflation making us feel richer and releasing equity to spend more
2. Cheap easy credit to buy those expensive houses and fund our lifestyles.

The BoE can have an effect on 2 by reducing interest rates, but then their 2% inflation target goes out of the window and this is their reason for being.
Also we need to remember that a vast industry exists around property, estate agents, surveyors, investors, mortage brokers etc etc which is now collapsing. They cry out for 'more help' in a vain attempt to get the market accelerating forwards again, but this would mean going back to poor assessment of risk and money just too easy to get.
The market has boomed for many years, too many in my view, so now the not so good times are here that mean the industry shrinks, such is business - it goes in cycles.
In my view interest rates should increase to at least 5.25% in Q3 of this year, maybe even 5.5% to get inflation under control and avoid the pay rise disasters of years gone by.
The re-adjustment is long overdue - we had the good times, now we need to let things normalise

There are so many serious flaws in Trichet’s view it is difficult to know where to start. The situation today is different from that in the 1970s in several important – in fact critical – ways. Inflation was already much higher then than it is now, and the nominal full employment was a sham because so much over-manning was concealed by incompetent mangers cowed by strong unions. The beliefs and actions of central bankers were very different in that era too – then they practised demand-management (badly) and cared not about inflation. Today the opposite is true.
Inflation in the 1970s and 80s helped a very great many ordinary people to become more wealthy, as it reduced the value of their debts (mortgages) and increased the value of their assets (houses). The low inflation we have today is great for bankers with their large cash piles. They may be able to sit out a major drop in asset values but it will ruin the rest of us.
It is understandably difficult for bankers raised in the 1960s and 1970s and indoctrinated by two decades of monetarist thinking to appreciate that this time the problems and dangers are more akin to those of the 1920s than those of their own youth.
Yet the withdrawal of credit and the effective drop in money supply it represents (for those who spend money on goods and services, if not the notional figures beloved of central bankers) will roll an ever bigger snowball down the hill to economic collapse unless it is halted. The decline in asset values, the collapse of banks, estate agents, removal companies, furniture sales firms, and so on will continue until no-one is unaffected.
Doubtless Trichet and King do not incline to this view. Unfortunately it does not matter much whether they choose to cut interest rates or not, since that lever no longer works properly to control either money supply or inflation (whichever definitions of those terms you espouse).
The time has come for governments to take the control of money back in-house. To say to the world’s central bankers that turning over the control of money to them was an interesting experiment but ultimately a failure. That those charged with the task of controlling the world’s economy enriched themselves at everyone else’s expense but couldn’t even do that properly without crashing the economy in the process. That (will all their faults) governments really do know better, and that the practical need to maintain economic demand is really more important than the strictures of monetarist economic theory.

You can't apply the brakes to a runaway train without some sparks.

The economy has been turbo charged with cheap debt, and the Government has acted like an adolescent joy rider.

I prey that the worst is not over yet. The nation, not just the truly prudent, need to realise that UK plc cannot survive on the paper wealth created by asset inflation. Now is the time to accept that change must come and short-term pain will be felt. The UK must aspire to emerge from this whole crisis a stronger nation, but this will only occur with strong and effective leadership…

I guess we've had it then!

At the risk of stating the obvious Retail Sales are down.

Demand for Retail goods by people who have mortgages is already very low.

Raising interest rates will only affect the poorer people (those who have mortgages, a lot of people now don't).

Raising interest rates will thusly only reduce demand for Retail goods in the part of Society already struggling with high energy bills, council tax, pay freezes etc.

Thusly, won't actually reduce much demand at all, as these people aren't spending much.

So one has to question the motives of people arguing for higher Interest Rates when they know they won't affect Inflation.

Some of the comments on the blog suggest the UK needs to invest in refining capacity for North sea oil? No maor is going to invest in refining capacity with the north sea being in terminal decline, they would be investing to lose money. Most of the major oil
exporters even Saudi Arabia are in Terminal decline they just wont admit it.

China and India are adding 10K cars a month too there roads and soon we will see a demand and supply problem, probably as early as 2010.

The worlds oil supplies have peaked and will forever decline, no new finds will fill the gap, we are using 4 barrels of oil for every one we find.

By 2020 we will globally be producing around the same amount on oil as we did in the early 1980's.

considering our monetary system is linked to cheap available energy in the form of cheap plentyful oil, one would think that Robert Peston might want to make this apparent to his viewers.

Make no mistake, the peak of cheap available oil has passed and this will impact everybodies lifes from now on.

Dear Robert,
lets get rid of all the Quango's and that will put Britain in the black and stop the shortage of money for the public purse.

Excellent Article Robert.

I am in total agreement with Trichet. As a commercial mortgage broker based in Ireland, we are at the cutting edge of the credit crunch. But while we are suffering during this period of adjustment, it gives me great comfort knowing that Trichet is at the helm.

Dublin
Ireland

Comparing assets now to those of the 70's isn't really fair principally because global population numbers and production costs are so much more diverse as is he massive impact of sovereign wealth funds almost unheard of then.
As with all shrewd operators, it is what they don't say that matters more than what they do and your summary of M. Trichet's views looks spot on.
However with all smart commentators there appears a gaping hole in assessing more closely how speculation works and the funding of it by clearing and investment banks.
Broker loan and discount funding to punters can only increase speculation and the commission earned from it for the sake of itself alone. Whats needs to be asekd is does speculation actuallty benefit either the base supplier or the end consumer.
What may suppress some speculation would be that clients need to pay teh full 'cash' value of the contract and not a percentage part of it, plus they would be obliged to hold it fo a minimum of 6 months after which they pay a premium of 25% over the cash price. If they choose to trade short they again have to pay in full.
Will this reduce speculation? Absolutely but not outright but more importantly it would stop the demented volatility that serves no one any purpose save for those who actually trade volatility!
The problem Central bankers need to get to grips with first is their disproportionate favouring of banks above all other sectors. This has led to cynicism and the belief that everyone is playing to the banks fiddle.
Whjat has not been nsweree by any politician or banker is that if my busines or any other got into trouble now would the central banks or Government rush to help. So until that does happen, which it never will, we are left hypothesising about what will happen.
The present balancing act of banks securing exra capital in exchange for short term
(which will be long term discounted debt) is still way to one sided in favour of the banks.
If there is to be any bail outs it should not happen at the expense of the taxpayer, either here or in continental europe.
M. Trichet knows the 'crunch' has a long way to go and was honest enough to admit it. What we need is more acceptance of what has gone wrong and not seek to perpetuate the opportunity of it hppening again which means not succumbing to arm twisting investment and/or clearing banks. that way we will move ahead and stop regressing for the sake of their disproportionate and over generous bonuses.

It is probably high time that the Bank of England and the Government adopted a more realistic and achievable Inflation target.

It is very clear that a target of 2% or less is going to be impossible to achieve in the current conditions.

Perhaps a more honest target of between 5% and 10% would be better.

With Commodity prices where they are and where they are undoubtedly heading, that would be more appropriate.

People would also appreciate the honesty, something that seems a little short in supply these days.

Now when will Mr Peston investigate the Hedge Funds and Spreadbetting community who are making Hay at all our expenses ?

#18 psmith_1967

You make some mighty glib statements. Unfortunately some without merit

There is indeed major investment planned for UK oil refining.
Check out what Sonhoe intends to do on Teesside. They are busy placing contracts with oil industry big boys.
A £2Bn investment might not seem big compared to some bank writedowns but it will build a big new refinery.

Crude oil might well keep going up in price but some of it will be refined on Teesside.

prudeboy says that major investment is being made in refinary production, he may be right, but there is no doubt that the north sea is in permenant decline, the north sea peaked in 1999 - 2000.
Investing in refining capacity in the north east is like investing in water production in Sudan.

There are not many countries that have not peaked.

Oil is finite and global demand is set to exceed global production. Our apitite for expotential growth is not substainable which means our debt based money system is not substainable.
and will leave our children with a barron planet with little or no resources. How selfish of us, how small minded, how stupid of us to destroy our planet for short term gain.

#24 psmith67

Get your analogies right!
Sudan has great water resources.
One of the worlds finest in fact - the Nile. Or are you saying that the North East is THE place for petrochems?

Of course Oil is a finite resource. It's just we don't know whereabouts on the curve we actually are.

Agreed that we should use all our resources wisely. Define wisely though..

#22 - that would be all fine and well apart from the fact that the target is at 2% not because that's where its achieveable, but that's where it needs to be. Genuinely, not based on some phoney statistics, excluding half the really bad stuff, and relying on computer parts from china to keep inflation down.

Having lived through the years of high inflation during the 1970's when prices and wages were doubling every four or five years I agree with Jean-Claude Trichet that inflation has the potential to become a much bigger curse, over the long term, than high interest rates designed to curb short term demand. The high inflation we experienced during the 70's fuelled high wage demands as well as increasing people living standards expectations. Except that is for the elderly and unemployed whose living standards fell dramatically. Unfortunately those high wage demands and increased living standards were not matched by productivity and efficiency gains and as a result UK plc became increasingly less competitive. That later manifested itself in high levels of unemployment particularly in industry and manufacturing.

The worry about increased oil and commodities prices this time round is the that the pendulum of fortune is swinging away from the western economies towards the eastern economies and at this moment in time it is difficult to see how this can be arrested. That can only mean that we should all expect to see a fall in our living standards in the foreseeable future, regardless of which party is in power.

One thing this government (or any government in this country) needs to address and cut down on is the ammount of money being spent by central government as well as local authorities on advisory bodies or Quango's. It is high time we found out if the people who are employed to run the country and manage the local authorities do have the necessary skills and are capable of doing the job they are being paid to do. We need fewer advisors on grossly inflated salaries and more doers on lower saleries. As a nation we have become experts at identifying and talking about what needs to be done but crap at actually getting things done. Perhaps we need some sort of revolution?

Here we go again! Robert Peston you gotta love him. For the past few weeks most other leading financiers have taken the view that credit markets are beginning to ease. RP has remained quiet. As soon as someone with a bleak assessment comes along and our Robert is in like flint! Fortunately the people who make interest rate decisions will be far better balanced and competent at economics than Bob. I would have thought a situation where the international oil price has sky rocketed and yet CPI is 3% is something to celebrate. A time traveller from the 70's would wonder what all the fuss is about! I reckon the BoE will still have room to trim interest rates if it needs to. Roberts financial Arnageddon postponed again!

I've just tried listening to this but Peston's eccentric style of delivery makes it unbearable. Who does he think he is talking to? Five year olds?
Can someone please take him aside and have a quiet word?

Why do my comments disappear when I click on "Post Comment"?

Commodities such as oil have largely gone up in price as the Dollar has fallen as Bernanke has slashed interest rates.

What I find interesting is that Sterling has fallen against the Dollar, even though our interest rates have not been cut by anywhere near as much as in America. This has made oil etc even more expensive for us.

Why is this?

I am very gloomy. Very gloomy indeed.

There is a real economy out there that has nothing to do with money. In that real economy 2 things are happening: (1) production has to shift to things that people in oil producing nations want; (2) we have to put real resources into reorganizing our economies to use different sources of energy, particularly for transport. Both these things mean that we in the West will be poorer for quite a few years. The political question is: how do we share that pain around. Inflation hits one group, high interest hits a different group. Higher taxes and more government activism would hit others. I favour more of government activism at the moment. Why is it that the only way we know to reorganize is collapse and rebuild?

Conceptually there are simple solutions that will act as a negative feedback loop to constrain bubble formation - these relate back to taxes.

For example the global housing markets that remained relatively unaffected by the bubble were those where there is an annual tax of around 4% on the land/building value. (Texas is an example)

Next, progressive income tax rates with no capital gains tax exemptions, Say with a top marginal tax rate of 90% for any income over $5m p.a. for example.

But we are unlikely to see anything like this happen. Rather the trend has been in the opposite direction. Why?

You might ask yourself why we insist on sustained economic growth if we only have one planet that we are already exploiting at an unsustainable rate (estimates of global renewable resource usage of 140% in 2005).

We have inbuilt evolutionary design faults. We have no feedback loops for the long term for one.
Democracy has a design fault - it is another short term feedback loop that rewards the protagonist who offers to give us the most in the short run. Any political party that stood for the ideas that I mentioned would be committing political suicide. Besides they would argue that all the rich would leave and go and live somewhere else has low tax rates. Anyway what passes as democracy now has been corrupted - the current Bush administration one of the best examples.

But our biggest bubbles are our global population and per capita consumption rates. How long before we join the other 99.9% of the species on this planet that are extinct?

Well said Mactennis.

After the 1970s oil shock Britain had lowered speed limits to conserve oil. Why not bring that back now, to conserve oil and cut emissions?

I'm not sure he actually said anything which is not obvious.

Oil/energy and food prices will continue to rise, we either pay them or change our behavoirs - which would be a good thing.

When asset prices go sky high and banks lend like a drunken sailor then something should be done about it.

We will go through a period where people have to pay off debts and reign in their spending/borrowing - it would not be hard to calculate the length of this from the relevant available data.

It's more important to manage inflation than to encourage people to borrow and spend more. It may help people to get other hobbies rather than just shopping and watching soaps.

What would be interesting is if somebody actually did something about our self-serving financial system, rather than just posturing.

We should also review Brown's rather dodgy tenure as Chancellor -' I saved the economy in the past, I can do it again' - so he means to push up house prices, borrow more money (done that) and increase the trade gap????

Don't we learn from this????

30. At 9:59 pm on 19 May 2008, markanash wrote:

to answer your question, please it needs to
moderating by the bbc....

Trichet, is correct about warning the oil shock.
In the nearby future, it could reach $200.00 dollars a barrel of oil.

Re #17 supercalmdown:

At the risk of stating the obvious Retail Sales are down.

Yes. Slightly. Over the last 2 months. They have risen considerably over, say, the last 10 years?


Demand for Retail goods by people who have mortgages is already very low.

Spending money buying "things" is hardly the way to wealth - why is it not a good thing for people - both those with and those without mortgages - to be spending less?


Raising interest rates will only affect the poorer people (those who have mortgages, a lot of people now don't).

Not true: it will also affect those that need the return from their savings to live. Rising inflation erodes both the value of those savings and the buying power of the income generated. Lowering interest rates reduces the income. Rising inflation combined with lower interest rates is a double-whammy. Those who have mortgages borrowed the money knowing that interest rates could rise and should have ensured that they could afford to service their borrowing in such an eventuality (or so the theory goes). Personally, I find one of the most disgusting features of the New Labour governance has been the way they have fooled people into thinking that they were becoming wealthier by assuming huge amounts of debt...


Raising interest rates will thusly only reduce demand for Retail goods in the part of Society already struggling with high energy bills, council tax, pay freezes etc.

Conversely, it will also produce higher incomes for those whose incomes are derived from savings, giving them a greater disposable income to spend on retail goods. In addition, sterling should strengthen thereby reducing the cost of imported goods (eg. energy) to everyone's benefit - especially those whose pay is frozen.


Thusly, won't actually reduce much demand at all, as these people aren't spending much.

Huh? You've just contradicted yourself: higher interest rates will lower demand (previous paragraph) but won't actually reduce demand (this paragraph)...


So one has to question the motives of people arguing for higher Interest Rates when they know they won't affect Inflation.

It's called economic responsibility. Higher interest rates will have an effect on inflation. How do you think the world got into this mess in the first place? Answer: *LOW* INTEREST RATES

Dear Robert

It is noticed by a few, that all is not well in the Oil Industry,,Contracts with oil companies are being torn up by governements ONCE THE INFRASTRUCTURE is in place to recover oil from the ground, and NATIONALISATION takes over.
Indonesia is the latest to with draw from OPEC, saying it is now an importer, BUT it has massive hidden reserves, Governments have realised that OIL is A NECESSITY FOR THEIR OWN USE, and not to be exported, Therefore Countries with oil are saying "its ours well keep it for a rainy day." -------
OPEC is finished, IT will disintegrate under the shortage of oil for the rest of the world, and OIL as Lord Curzon famously stated is worth going to war over?