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HALF BAKED BEAN
By John Newsome on 18th March 2011


It is all too easy to assume that individuals in positions of power know what they are doing. I recently saw an anonymous quote which opined that when you are young, you assume the world is generally organised along sensible lines. However, as you get older, you realise just how random and chaotic it truly is. Being trainee grumpy old men ourselves, it obviously struck a chord.


It also got us thinking, not for the first time, about Mr Charles Bean, Deputy Governor of the Bank of England and Monetary Policy Committee (MPC) member. He is not to be confused with the other Mr Bean. One lacks commonsense, struggles to relate to the world around him and constantly misses the obvious while the other is the comedic creation of Rowan Atkinson.


Mr Bean hit the headlines last year when he told British consumers they should spend more and save less in order to boost economic recovery. He went on to suggest that older savers should not expect to live off their interest in the current climate but should be prepared to spend capital.


Mmmm …… let's see; their job may not be safe, their house possibly carries negative equity, their pension provision is inadequate and they may want to help their children through university. What is the antidote to these multiple problems? Of course, the solution is staring them in the face; they should spend even more.


More recently, showing all the foresight of Nostradamus (after his death), Mr Bean commented that he has become more concerned that elevated inflation may persist for longer than he originally thought and the risk of inflation moving higher has risen. Really? After effectively printing £200bn of new money and voting to deliver and maintain the lowest base rate in the history of the Bank of England, Mr Bean admitted the Bank had underestimated the effects of Sterling depreciation and commodity price hikes. No wonder the current level of inflation is twice the Bank's target.


To be fair to Mr Bean, he is not alone. The entire MPC's credibility has been badly damaged by its persistent inability to make even half accurate predictions. It has chosen to ignore the most overwhelming evidence in order to maintain its stance that price pressures are temporary and so called 'core' inflation, which ignores the distortions of food and fuel prices, is a relevant concept. It may be for those that neither eat nor travel but for the rest of us, it's meaningless.


The problem with inflation is that once the genie is out of the bottle, it is devilishly difficult to contain it again. As the U.S. fund manager, Frederick Sheehan says "When inflation is rising, it is necessary to take matters into one's own hands or get crushed. Those who remain whole during inflationary periods act early." He is not wrong.

 

John Newsome can be contacted on:
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