Economy is busted – a deeper slump, rate rises, wage cuts and revolution ahead

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IN his letter to Chancellor Osborne, the Bank of England governor Kings asks: ‘Why has inflation moved away from the target?’

His answer is: ‘three factors can account for the current high level of inflation: the rise in VAT relative to a year ago, the continuing consequences of the fall in sterling in late 2007 and 2008, and recent increases in commodity prices, particularly energy prices.’

He then asks: ‘Over what period does the MPC expect inflation to return to target?’ His answer is that neither he nor his committee, which is divided, is able to provide an answer.

He states: ‘There is a great deal of uncertainty about the medium-term outlook for inflation. And I do not wish to conceal that there are real differences of view within the Committee, reflecting different judgements about the risks to that outlook.’ The ship is sinking and the officers are quarrelling!

‘Inflation is likely to continue to pick up to somewhere between 4 per cent and 5 per cent over the next few months . . .’, he adds.

He has in fact to recommend rate rises as he peers into the fog of the economic collapse. ‘The MPC’s central judgement, under that assumption that the bank rate increases in line with market expectations, remains that, as the temporary effects of the factors listed above wane, inflation will fall back so that it is about as likely to be above the target as below it two to three years ahead.’

This confession of bankruptcy accepts that increases in world commodity and energy prices are ‘temporary’. He does not dare discuss whether they could be more long standing.

However: ‘The MPC judges that attempting to bring inflation back to the target quickly risks generating undesirable volatility in output and would increase the chances of undershooting the target in the medium term.’ This means a sharp increase in interest rates risks a complete collapse of what economy there is.

King notes that ‘members of the Committee hold differing views about the risks to inflation in the medium term.’

This situation is indeed alarming but ‘every member of the Committee is conscious that there are large risks in both directions. And no one should be in any doubt that when the balance of risks requires it, every member of the Committee is determined to act to adjust policy in order to bring the risks back into balance.’

He concludes: ‘The best contribution monetary policy can make to high and stable levels of growth and employment is to ensure price stability in the medium term. The Committee will set policy, in the light of the economic outlook, in order to return inflation to the target in the medium term.’

This outpouring has been interpreted by bourgeois economic commentators as meaning that ‘UK interest rates will rise three times in 2011’ in line with ‘market expectations’.

Such increases will mean a big rise in home repossessions as mortgage interest rates rise, and a further growth in mass unemployment as bank loans become more expensive, and a mass of struggling companies go to the wall.

Three rate rises will tend to increase the price of sterling, making exports more expensive, and there has already been a decline in production in the last quarter of 2010.

Yesterday there was an ‘unexpected’ rise in unemployment. This is after the CPI inflation rate hit 4 per cent and the RPI rate hit 5.1 per cent.

The Office for National Statistics said that the number of people without a job rose by 44,000 in the three months to December to 2.49 million. This is with up to 200,000 public sector sackings directly ahead.

Unemployment in the 16 to 24 age group rose to 965,000, the highest since records began in 1992.

Average weekly earnings growth slowed to just 1.8 per cent in the three months to December, a savage wage cut that no doubt pleased the bank.

Despite these savage attacks, the British capitalist economy is doing a ‘Titanic’.

The only way out of this crisis for the working class and the middle class is to carry out a socialist revolution that brings in a workers government and a planned socialist economy and puts an end to the capitalist system.