Tag Archives: monetary policy

Horse meat found in Ikea meatballs

Ever since this horse meat scandal started spreading around Europe, we've all known that Ikea meatballs are made of horse meat. Of course they are. I mean come on, they cost about 30p each, and that's in the restaurant. What did you think they were made of? Prize cuts of Aberdeen Angus.

In the same vein, Moody's told us on Friday that the UK economy is sick. Of course it is sick, we all know it's sick and we've all known for a long time. Moody's expect the “period of sluggish growth to extend into the second half of the decade”. We are now well informed about “the UK's high and rising debt burden”.

The thing is, none of this changes the UK's ability to repay its debt. If it needs the £s to pay it can just print them. They may become worthless relative to any other currency or any good or service, but the obligation will still be met. The risk of default remains unchanged. In Moody's eyes, they've moved from the “lowest credit risk” to a ” very low credit risk”. This doesn't make sense. The only reason the UK would default on its debt is if there were a political desire to do so. Nothing in Moody's statement pointed to a change in the political landscape weakening the UK's commitment to meeting its obligations.

Moody's have simply further damaged their reputation in my eyes with this action. They are not great as an assessor of default risk and even worse as economic commentator. As a stick for the Labour opposition to beat the coalition with, however, maybe they have a role to play.

Anyway let's move on to more important stuff like Italian elections. Surely that's worth a 30% VIX spike.



How much for a bottle of maple syrup in today’s money?

Last month, we had Mark Carney, the Governor of the Bank of England designate discussing the merits of nominal GDP targeting, alongside greater inflation targeting flexibility and forward rate guidance. The text of his Guidance speech to the CFA Society Toronto is an interesting read. Despite his remarks that they did not contain any direct signals about policy in Canada or elsewhere, it’s pretty clear that it will not be more of the same at the Bank of England after he assumes the position on 1 July 2013. At a CBI dinner in Belfast on Tuesday, Mervyn King responded arguing that the Bank of England’s inflation-targeting remit may need to be fine-tuned but should not undergo fundamental change.
The inflation target and monetary policy mandate is set by the Treasury, not by the Bank of England, so the remit is not really theirs to decide. This is set each March on the day of the budget, with any change needing to come from the Chancellor.
It is interesting to trace each man’s own inflation experience. King celebrated his 18th birthday on 30 March 1966. Carney celebrated his 18th birthday on 16 March 1983.
Over their adult life, Carney has seen domestic inflation grow at a rate of 2.6% per annum. By contrast, King has experienced inflation of 6.2% per annum.

Comparison of UK and Canadian Inflation

Indices are rebased to 100 in the month of each individual’s 18th Birthday, March 1966 for King, March 1983 for Carney.

Source: Bloomberg, as at 31 December 2012.

Now of course, Carney hasn’t lived his whole life in Canada and neither individual is conditioned solely by their domestic experience but it may go some way to explaining a different attitude.
The challenge remains for policy makers to walk the tightrope of stimulating economic growth and keeping inflation in check. The expectation is for inflation to remain above target for 2013 and the challenge is set for Carney as he assumes the role in July.

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