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May 03, 2007

Vote, Vote, Vote for Central Banking!
by Adrian Ash

"...What if the 'first win' of globalization didn't go to China? What if it went to central bank policy wonks instead - free to keep real interest rates low despite oil prices trebling...?"

TAX PAYERS in Britain were invited to vote early and often in today's local council elections. The French will get to choose between one bone-head and another this weekend, too.

But amid the door-stepping and live TV wrangling in Europe right now, it's a poor central bank drudge who seems to want victory most.

Mervyn King, governor of the Bank of England, celebrated its first decade of political independence with a speech in the City last night. No one lobbed bread rolls or fruit at the governor, not according to this morning's press reports at least. It's only polite to allow a guest speaker his views, after all.

But even a room full of "dismal scientists" must have gasped at the cheek of the man. To quote:

"Inflation expectations [in the United Kingdom] have been anchored," he said, "because the Monetary Policy Committee has responded to events that have pushed the outlook for inflation away from target - and households, businesses and financial markets have understood and anticipated our responses."

Oh yeah? The money supply has been growing at double-digits for two years running. But "the crucial achievement of the MPC is to have anchored inflation expectations," said King. "It is not, I believe, credible to dismiss that solely as the result of luck."

Bravo...encore!

"On that sunny Bank Holiday morning in 1997, we knew [the government] had given us an opportunity to change monetary policy for the better. We had to grab it with both hands. That is exactly what the Bank has done."

Vote, vote, vote for Mervyn King!

"The average deviation of inflation from target has been just minus 0.08 percentage points," the Trimmer went on. But he was big enough to mention - alongside his lack of good fortune - a couple of "downside" shocks to general price levels. First the Pound Sterling rose by 25%, he noted, squashing import prices by one fifth. Then we experienced the largest inflow of migrant labor since Harold Macmillan was prime minister in the early 1950s.

What Mervyn King failed to do, however, was add them together.

Sterling's rise - plus the flood of cheap migrant workers, now reckoned at around 1% of the population every two years - has helped keep a lid on both wages and import prices. Not a word from Dr. King on this, however. More shocking still, he also failed to mention China, India, Asia, globalization, outsourcing, the global labour arbitrage, and the internet.

No kidding! Britain's chief economist...talking about inflation...didn't mention the big win he's enjoyed from globalization. Not once. So let's mention it for him.

Take East Asian wage rates, for instance. What have they got to do with the price of fish, you might wonder. Well, the price of fish for British consumers rose 12.6% in the last 12 months, as it happens. But the cost of new clothes, mostly produced in East Asia today, fell more than 8% in the last two years alone. The price of a new television has sunk by one fifth. New cameras are 34% cheaper; furniture's unchanged; carpets and drapes are 7% cheaper; games and toys are more than 5% lower from Jan. 2005.

Worth a mention, Dr. King?

"Ricardian comparative advantage tells us that the first win [of globalization] goes to low-wage workers in developing economies," noted Stephen Roach, chief economist at Morgan Stanley, recently. "[They] enter the global economy initially through their involvement in export production and eventually as a new class of consumers."

"The second win [of globalization] is presumed to benefit the rich nations of the developed world," Roach went on - "where consumers can expand their standard of living by buying low-cost, high-quality goods from poor countries and where workers can ultimately gain from being involved in the production of more sophisticated products exported to increasingly prosperous developing economies."

This much seems true at first glance. "But it's not working as advertised," said the Morgan Stanley man. "The first win is hard to dispute. China has led the way, with more than a quadrupling of its per capita GDP since the early 1990s...[But] in recent years, the benefits of the second win have accrued primarily to the owners of capital at the expense of the providers of labor."

In short - and as in all inflationary periods - the returns to labor have been way outstripped by the returns to capital. But what if we go a step further, too? What if the "first win" didn't go to China? What if it went to Western central bankers instead?

The shock disinflation enjoyed by the developed world since 1997 - in clothing, footwear, computers, TVs, DVDs, mobile phones, year-round fruit and vegetables - did it not give the "first win" of globalization straight to central bankers? Despite a tripling of oil prices, they've been able to keep real interest rates static...pushing property values up to all-time record levels...creating the biggest credit bubble in history...and reflating the world's stock markets as though spring 2000 never happened.

A central banker looking to take credit for "anchoring" inflation in the early 21st century might want, you would guess, to acknowledge this fact at least. He'd certainly nod towards globalization itself. But no.

In praising that sunny day in May 1997 when the Old Ladies were set free to make policy over tea and biscuits once a month, Mervyn King failed to mention the single biggest influence on consumer prices of the last decade - the sinking price of consumer goods.

Ten years on from winning his freedom, Mervyn King would do well to remember it. An end to this "first win" might let UK inflation - already rising at a 17-year record - slip anchor.

Adrian Ash
BullionVault.com

Head of research at BullionVault.com, the fastest growing gold bullion service online, Adrian Ash is also City correspondent for The Daily Reckoning in London, and a regular contributor to MoneyWeek magazine.

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