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Tuesday, February 24, 2009

Mr. Sentance should be sentenced!

I see why folks in the UK fear the worst for the economy!! In this recent speech on behalf of the BOE by ANDREW SENTANCE/
MEMBER OF THE MONETARY POLICY COMMITTEE
BANK OF ENGLAND
, is more vague than anything I could have ever imagined.

Knowing how astute Brit's are with the English language, they too can pick up on this truck load of horse radish when they hear/see it. If the logic is inconsistent, then, most likely someone will point it out--perhaps with more celerity than I would or ever could. Such lyrical legerdemain would be exposed in a heartbeat and Mr. Sentance would become bete-noire because of such dodgyness in two heartbeats!

In any event, Mr. Sentance is projecting an uptick in Business Confidence to come about in the next month or so, which will signal the end of the worst part of this recession. He is basing his projections on previous recessionary data and assumptions on those recessionary periods.

However, if this recession and the root cause of it is still yet determined and, considering if whether or not the extra-ordinary measures put in place to secure the economy were more than merely conventional; i.e, re-capitalizing banks and; untangling the confusing web of financial derivatives/swaps, which led to this toxic soup of bad assets, which also need to be stricken off of the books of banks to assist them with having the confidence to lend to other institutions without fear of exposure to more toxic debt liabilities, then, how can he suggest that based on previous performances that he expects the same time frame for business confidence to pick up and show more favourable responses to questionnaire's?

Seems as if Mr. Sentance is using an old play book, for a totally different ball game!

In any event, this speech, honestly, was more of a book report, rather than a policy prescription or economic ukase. He would have gotten a C+ from me--based on his historically accurate account of what has already happened, but no more than that because he based his projections of things to come on a faulty and incomplete premise, as one example mentioned above shows.

In addition, this issue with monetary policy, controlling prices, is a little overstated as well as under examined analytically.

As Mr. Sentance puts it: "Despite the current recession, I still believe that the operation of monetary policy under the current framework of inflation targets has helped greatly to stabilise the UK economy compared with the inflationary boom-bust period of the 1970s, 1980s and early 1990s. Monetary policy can – over a suitable period of time – maintain price stability broadly defined." (pg. 19)

I think I mentioned the problems I have with Central Banks, trying to convey the feeling that they can control the price of goods and services, through monetary policy--or, as aforementioned in Mr. Sentance's speech, Quantitative Easing (QE).

A Central Bank, cannot control prices, through monetary policy--the contraction or expansion of money supply through interest rates-- if the price of the goods/services are over-valued, through the market pricing mechanism.

Secondly, access to money, will not spur my demand to buy a good/service, I do not want--we have raised people out of abject and pervasive poverty and, access to basic amenities, have become common; i.e, cellular phones; computers and; affordable, personal, transportation.

Thirdly, particularly for investors, if a good is under-valued at market levels due to the lack of information on the exact pricing of that good/service, nothing increasing money supply through the interest rate can do about that--in fact, you would increase inflation in other goods or services.

Misguided inflation? Sounds like a good enough term for it.

For example, if you wish to spur activity in the housing sector, but, if homes are under valued or people have simply just had enough of home buying, or, it is a losers market for buying the second home (lack of possible renters and you risk paying for two homes, in the long run, rather than the one you can only live in at this present point and time)--then, lowering interest rates, would cause a reaction in another sector--let's say the automobile sector-- where the level of prices in automobiles are more than market sufficient.

This is not a policy prescription for dealing with a matter such as price stabilization. In fact, it is ad-hoc and dangerous and, with more regression analysis on specifics of price targets in regards to inflation targets to that of spot prices in the market for goods and business buoyancy measures (CPI and Corporate Debt Issuance in particular), it can perhaps be shown that it [cutting interest rates] acted in the in the opposite (or a misguided) fashion, more often than not. Perhaps, it would also show that it was never effective at all as a price stabilizer/manipulator, either.

I can see why people like Paul Krugman et al, label QE as in-effective, especially in relation to this "liquidity trap"...which is, of course, another story to it self, but its tenets bear repeating here for the sake of the argument and its close resemblance.

Why is it that Mr. Sentance and the BOE, are going to continue this line of logic on QE along with monetary policy in regards to price stabilization through inflation control, when they are totally separate and completely unhinged ideals?

Why give the impression that you can solve a problem, you know full well you can't solve, never solve and have no intention of solving, for the better good moving forward? Unless the government actors want, truly, a big government controlled state, this would not be economically efficient for all parties involved.

I guess it must be true that governments are moving towards COMMUNISM--not socialism-- in a greater more hastened stride.

Go figure!?
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