On Wednesday I watched the latest press conference by Bank of England governor, Mark Carney.
Right now, central banks are feeling almighty and powerful. None more so than the Bank of England.
I’ve said it before, and I’ll say it again: the control they assume they have is illusory.
Everything works fine on the way up. Central banks, with their unique ability to control the money supply can successfully rally economies.
But what central banks cannot do is keep markets from disintegrating. At some point, I know that’s going to happen. It’s inevitable.
Plus there’s the ever-present threat to every saver and investor; the pest that slowly but surely chews up your money, like a mouse nibbling away at a packet of biscuits in your cupboard until there’s nothing left: inflation.
So what did Mark Carney actually say in front of the world’s media on Wednesday?
“This economy is helping to lead the global recovery… the biggest challenge is to fully realise the potential of the BoE”.
Come again? The UK is leading a global recovery? And after years of bizarre monetary experiments like QE, what we actually need is more meddling by the central bank?
The man is deluded. And his delusions make him frighteningly complacent.
Let’s face it. In any ‘normal’ world, we would now be looking at interest rates going up.
The economy is really starting to move. The Bank is forecasting 3.4% growth in 2014. And house prices, as we all know, are rising dramatically.
But Carney indicated that interest rates won’t be going up any time soon.
As one astonished journalist asked “If 3.5% growth isn’t enough to start normalising rates, then what on earth is?”
Bloody good question.
Why you can’t trust Mark Carney’s inflation predictions
And what about the enemy of savers, investors and consumers – inflation?
Well, to help us with this question, Mark Carney has come up with a nice picture. It’s my favourite chart from the inflation report, and it perfectly illustrates the extent of the man’s delusions. Here it is:
The black line across the centre of the chart shows the Bank of England’s target for inflation: 2%. That’s pretty clear.
So where has inflation actually been over the past four years? That’s the red line on the left hand side. As you can see, for the whole four-year period, except for the last quarter of 2013, it was way above the 2% target. Not such a great job there, then.
And where does Mark Carney now predict inflation will be? Well, that’s the pretty rose-coloured fan shape on the right hand side.
Mark Carney is 30% sure that inflation will be within the dark red area. And he’s 90% sure that inflation will fall inside the lighter red area. In other words, he thinks there’s only a 10% chance that inflation will fall outside the light red area.
Given where the red line on the left of the chart has been, compared to the target black line (2%), would you have much confidence in these predictions?
The Bank of England is completely ignoring reality.
The fact of the matter is, inflation looks like it has been tamed because global energy and commodity prices have stabilised. Plus, the pound has been surprisingly strong. A strong pound means cheaper imports, and hence lower inflation.
Is this a stable situation, which Mark Carney can feel comfortable about? Absolutely not.
Two big problems
First, we don’t have any control over global resource prices. Demand for resources is strengthening. We can’t rule out higher commodities prices.
Second, the very reason the pound has strengthened is off the back of a consumer-led credit recovery, a recovery that would normally give rise to higher rates. But if Carney won’t allow rates to rise, then why should the pound remain strong? Especially if something goes wrong with the economy.
Higher commodities prices plus a weak pound; that would equal serious inflation, and a lot of bites taken out of our wealth.
Mark Carney thinks everything is going in the right direction.
But as I say, I’m worried.