Finance (No. 2) Bill

Lord Ryder of Wensum Excerpts

Monday 22nd November 2010 Lords Chamber

[Lord Ryder of Wensum]

My Lords, I make no apology for treating the Second Reading of the Finance (No. 2) Bill in the same way as the Second Reading of other finance Bills. Exactly a year ago today, during the debate on the Queen’s Speech, I devoted my speech solely to the dangers of inflation. Nothing that has transpired since then has eased the scale of my concerns.

First, let me put my views into context, for fear of misrepresentation. After the crash, I supported quantitative easing as devised by Ben Bernanke. We were very lucky to benefit from his scholarly knowledge of the great depression. As a disciple of Milton Friedman, Bernanke adopted this policy, put to him by Friedman, at his 90th birthday party, shortly before his death. However, I doubt whether Friedman would have approved of quantitative easing mark 2 in the USA—and, above all, here—on the ground of it risking further inflation. Reasons for that have been given with great clarity by Alan Greenspan, the OECD and countless others.

Some of us, opposition veterans in the wars against inflation in the 1970s and Treasury Ministers later, will recognise only too well neo-Keynesian phrases such as “competitive sterling” and “stable inflationary expectations” as no more than euphemisms for creeping inflation. Indeed, Lord Kahn, the neo-Keynesian guru from the 1970s era, preached that,

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

Kahn’s disciples still prowl in the anterooms of influence, and their drugs of preference remain excessive demand and gradual reflation. These diehards are under the delusion that their drugs are stimulants. They are not. They are sedatives, because inflation retards growth and saps commercial will. Ludwig Erhard wrote:

“Inflation is not the result of a curse or a tragic fate but of a frivolous … policy”.

Can the Bank of England and its Monetary Policy Committee be relied on to reach the right judgments on inflation? After all, for about three and a half out of the past four years the Bank has overshot its inflation target. The governor’s letters of explanation to the Chancellors would fill a Treasury filing cabinet, but sometimes I question whether they were worth the postage. Our inflation rate is consistently double that of the eurozone and the United States. Whereas the Bank blames its errors on “price shocks”, I prefer to ascribe them to blind eyes turned to the glaringly obvious. So it seems, on the surface, does the Bank’s chief economist, Spencer Dale, who has counselled against an increase in money creation through the purchase of government bonds and warned about the perils of injecting further liquidity for fear of it worsening inflation, whereas the governor has often given the impression that inflation, though genetic in our case, is the result of a temporary surge.

It is not hard to account for some reasons why our inflation is double that of the eurozone and the United States. Sterling has fallen by 20 per cent against the euro and 30 per cent against the dollar over the past three years. The GDP deflator has risen by about 5 per cent at an annualised rate that is twice as much as usual. Spare capacity has not borne down on inflation, and the asset price index has burgeoned over the past two years. However, extra tribulations are flooding the pipeline—including the rise in VAT, the increase in gas and electricity charges by 8 per cent from next month, ascending food price inflation, already calculated at 4.4 per cent by the British Retail Consortium, as well as escalating petrol prices. Car insurance has leapt up by 38 per cent and rail fares will exceed inflation for years ahead. It is no wonder that a fortnight ago PIMCO, the world’s leading bond manager, urged caution, saying that over the next three to five years it sees multiple drivers of inflation and that,

“the balance of risk is certainly shifting from disinflation to inflation”.

Of course PIMCO is right. Quantitative easing mark 2 in the United States could be the thin end of another inflation wedge, just as it would be here where the United Kingdom is genetically prone to the disease of inflation. I share the opinion of the German Finance Minister that this undermines the credibility of US economic policy. “Clueless”, he called it. I also sympathise with the Chinese and the Brazilians for castigating the Obama Government for pursuing dollar devaluation as a means of dodging more prudent and effective policies.

Meanwhile the gold price seldom lies, and even silver is at a 30-year high. Cotton and sugar prices have surged by nearly 70 per cent since August. No wonder commodity brokers in the Chicago pits are in full cry. As for the notion that grain prices may have peaked, this may be correct. But before long they will rocket again due to higher demand in Asia and the Middle East. Reflation produces an illusionary joy ride. It is the so-called acceptable level of inflation founded on expediency. The visible effect may seem all right in the short term, except for those living on fixed earnings. The invisible effect—the inevitable medium-term consequence—is that when inflation accelerates, goods are priced out of markets and it becomes harder to create private sector jobs.

I have always believed that the prime economic duty of a Government is to maintain the value of their currency. That is why, as a member of the MPC, I would now join Andrew Sentance in seeking a small increase, if only as a necessary signal, to interest rates. I do not believe that this would disrupt business or consumer confidence. Alas, the credibility of the Bank is at stake—the same Bank whose complacency led in large part to a huge UK private-sector debt and the biggest house-price bubble in British history. They had better not get it wrong again—otherwise the wisdom of Ludwig Erhard will once more prove accurate. Inflation is the result not of a curse or a tragic fate but of a frivolous policy pursued by softheads allowing expedience to triumph over experience.