It’s an important debate because if decoupling has occurred that implies something has gone seriously wrong with our economy and policymakers should take some sort of corrective action. On the other hand, if there has been no decoupling one would expect workers’ pay to bounce back with the return to growth and no such radical action is necessary.
The headlines responding to the Bank of England’s change to the Funding for Lending Scheme focused predictably on the anticipated housing bubble and the implications for the building sector, whose investors appear to have been caught napping.
If you funnel more high incomes through a progressive income tax system (of the sort we we have in Britain) you will see those on higher incomes paying a higher share of the total take. It doesn’t mean, as some newspapers imply, that the very wealthiest have been bashed like pinatas by a rich-hating state.
Like Jim Bowen The Old Lady of Threadneedle Street is showing us what would have happened if the financial markets had taken its “lower for longer” message on interest rates more fully to heart.
Is it plausible that, with the aggregate debt to income ratio still at 140 per cent, people are now happy to stop saving and even, at some stage, to start borrowing again? If one’s answer to this is no, one would expect the saving ratio to rise again and for consumer consumption growth to fall back.
In November’s Inflation Report, published today, the Bank appears to throw up its hands in despair over the UK-US short-term interest rate synchronisation.
While rate increases should be some way off yet, improvements in a range of economic indicators mean that ever more attention is set to shift towards the question of how and when monetary policy tightens. While calls for action are likely to build, the avoidance of premature movement will be vital.
I suspect that what most people are getting at when they ask whether we are seeing a bubble or not is something different. What they really mean is: are houses too expensive?
There’s something worrying about modern attitudes to Mao. But I would suggest that the problem lies less in China, than among modish Western intellectuals.
If Threadneedle Street thought traders’ expectation of rate rises were “not warranted” in July it’s going to be tricky for the Bank to label expectations of an even more rapid rise warranted now.
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