Queen's Speech

Lord Ryder of Wensum Excerpts

Wednesday 2nd June 2010 Lords Chamber

[Lord Ryder of Wensum]

My Lords, I congratulate my noble friends on the Front Bench and pay full tribute to the skills of the noble Lord, Lord Myners, as a Minister over the past 18 months.

I expressed my disagreement in your Lordships’ House with the policy of the then Opposition of sharing the proceeds of growth when it was clear that, long before the collapse in the markets, Mr Brown’s public spending, underpinned by the so-called golden rule, was out of control. I urged the then Opposition to alter their line, alas without success. Later, in a debate last November, I sought to persuade your Lordships that a ramification of quantitative easing, and our exit from it, could be a resurgence of inflation. Today, CPI stands at 3.7 per cent and RPI at 5.3 per cent, nearly double the EU rate and the highest for 20 years. The UK has tripled its monetary base in a single year.

Alan Greenspan, the former Federal Reserve chairman, writing in the Financial Times a year ago, highlighted inflation as the real threat to Britain’s sustained recovery. He warned that the pending avalanche of government debt on to the global markets made inflation a special concern. Nearer home, at the same time, Spencer Dale, the Bank of England’s chief economist, warned about the dangers of injecting further liquidity for fear of igniting inflation. Let us hope that his boss, the governor, is no longer influenced by a Cambridge mentor of the 1960s and 1970s—the neo-Keynesian Lord Kahn—who preached that,

“the right aim of monetary policy is not to secure a stable price level”.

Kahn’s disciples still hover in the anterooms of influence and their drug of preference has always been excessive demand. An undimmed principle stands out to those of us active in the inflation battles of 30 and 40 years ago. Inflation cannot maintain high levels of employment in any but the shortest term. In the longer run, to keep up employment, larger doses of the drug are needed, accelerating inflation still further. The outcome is high unemployment, misery and potential social unrest.

No wonder that gold is strong as investors flee government-supplied currencies. Of sterling, the euro and the dollar, none, at the moment, inspires faith. The dollar may be the least weak, but a strong suspicion lurks in some quarters that even the US Administration will permit inflation to tackle part of their ballooning deficit.

Of course, an independent sterling provides us with more levers than the euro would, including the freedom to depreciate our currency, but it also enhances the risk of inflation being used to erode the value of public debt. Veterans from the 1970s battle against inflation and the then neo-Keynesian orthodoxy recognise the phrases “competitive sterling” and “stable inflation expectations” as no more than euphemisms for creeping inflation. We must not be seduced by the bogus charms of currency debasement designed to diminish sovereign debt. Nor must a feeble pound be used as a substitute for robust fiscal decisions and, if necessary, tighter monetary policy.

The OECD, in its economic outlook published last month, stated that the UK, almost alone, risked credibility on inflation. Of course, the OECD realised that inflation has exceeded the 2 per cent Bank of England target in no fewer than 24 of the past 30 months. The OECD predicted that interest rates could reach 3.5 per cent within 18 months due to the Bank’s failure to staunch inflation. That could result in a triple blow of higher taxes, higher spending cuts and rising interest rates. That is why we cannot be relaxed, let alone cavalier, about inflation.

It is certain that the Chancellor will implement changes on 22 June with inflationary implications. Manufacturers have reported rises in the cost of not just oil-related products but other materials, such as rubber and timber. Factory-gate inflation has just risen for the sixth month running.

The British are prone to inflation as a genetic disease. In effect, it is taxation without parliamentary approval. We must recover with sound money or we shall not recover at all. Unless the upward trend is checked, the Bank must act without delay.