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To George, from Mervyn

On Wednesday the Bank of England publishes its quarterly inflation report and the Governor, Mervyn King, will tomorrow write his customary official letter to the Chancellor explaining the reasons why the target of 2% has not been met for the 10th time since April 2007. Our man on the inside managed to hack into the Governor’s computer and has emailed a copy of a private letter sent to Downing Street ahead of the official letter. We are pleased to publish it in full for the benefit of our readers.

Bank of England
Threadbare Street
London EC2R 8AH

Dear George,

Hope you don’t mind but I thought I’d drop you a personal note before my official letter drops on the mat tomorrow.

No doubt you have read the press reports that inflation is ready to stampede and that the Old Lady’s reputation is on the line. I hope, like me, you take no notice!

I’ve no need to tell you that there is a lot of rot talked about inflation, prices and interest rates. People, thank goodness, are confused, and fortunately the press pundits take opposite views so no one can form an objective opinion or remember the real cause of the present crisis.

The situation is confused, I grant you. But this is what happens when you get people in government who have no economic training and take decisions for short-term political advantages. You know who I mean, I’m sure!

What we both know is that inflation is not the cause of rising prices. Rising prices are the cause of inflation. Prices are rising for three basic reasons. First, tax. The least said about that the better, I think. Second, bad harvests and shortages of supply push prices up to prevent suppliers running out of stock. This is the natural law of supply and demand at work in a capitalist society. Yes, people have less money in their pockets and are led to believe that it is due to inflation. The third reason is the value of money. What do they think happened to that £200bn we poured into the system? Not only did it water down the value of the currency but, with the interest rate at near zero, it gave the city the opportunity to speculate in commodities in order to make a turn and keep their clients and shareholders happy.

And, can you believe it, in order to maintain their profits producers and suppliers are actually speculating on the interest rate going up in May, with the effect that prices are being pushed up now in anticipation! What is the world coming to?

I know you must be worried about the inflation forecast and I admit it is not an easy hand we have been dealt. With a rate of 0.5% the ‘savers’ are doing badly and are desperate for a better return on their money. Where they think the interest on their savings comes from, I don’t know! As if it grew on trees not from some form of production or other. Be that as it may the cry is ‘up the rate’. What the savers and all the other people don’t seem to realise is that an increase in the interest rate will be reflected in the prices they pay for goods, services and mortgages, and that companies on the edge will fail and unemployment will rise. And not forgetting that ‘the government’ will have to pay more in interest on the national debt. For goodness sake it already costs us £120m a day to service the £2.3 trillion debt we have. Yes, £120 million of taxpayers money going straight into the coffers of the banks and bondholders. Just think of the cuts you could save with that lot!

I know you must be working on the budget right now, but any time you need some advice or a shoulder to cry on give me a call and come over for a cup of tea and a biscuit. Oops, I’d forgotten – no more biccies – we are economising!

Kindest Regards,