Economic bollocks

The Facebook addict I love updated her status to the following this morning while I was watching The Andrew Marr Show: “Phyllis is listening to Thomas shouting ‘You are talking economic bollocks’ at Gordon Brown on the telly!”

The whole interview is here.

The stuff that upset me was the following – I’ve highlighted the offending bits.:

ANDREW MARR: And if interest rates are down there, there’s nothing you can do to help [pensioners living on the interest from saving].

GORDON BROWN: But hold on, Andrew. Remember that the worst thing that could happen to a pensioner on a fixed income, or other people who’ve got limited savings and are on these fixed incomes, is if inflation went out of control. And throughout the whole of the last eleven years, we’ve kept inflation under control, we’ve kept interest rates relatively low as a result of that…

ANDREW MARR: And you…

GORDON BROWN: …but it’s necessary at the moment for the economy to have low interest rates, I think most people would agree, for there to be economic activity. So the answer is not that there be high interest rates and high inflation. The answer is that we do more to help savers, which is what we’re looking at.

ANDREW MARR: But far from it being high interest rates, I mean we’re looking at interest rates going below 2% everyone seems to agree.

[…]

GORDON BROWN: I think you’ll probably find that the fall in the oil prices is pushing inflation down, the fall in interest rates is helping to push inflation down at the moment, we’ve got an exchange rate pressure upwards. So it remains something that the Governor will continue to look at.

Basic economic theory is that you lower the interest rate to stimulate the economy although this might lead to increased inflation, while you raise the interest rate to curb inflation and cool the economy.

So Gordon Brown is making several simple mistakes here:

(1) He claims interest rates have been kept low because inflation was low. That might have been the case, but that’s hardly anything to be proud of – that’s exactly what created the bubbles.

(2) He thinks the alternative to the current ultra-low interest rates is high interest rates and high inflation. But high interest rates will normally lead to lower inflation, not higher. The reason the Bank of England are willing to lower the interest rate is that they’re forecasting that deflation is a real possibility and they therefore don’t think high inflation is a real risk.

(3) He then says that the fall in interest rates is pushing down inflation. Again, this is definitely not economic orthodoxy. Falling interest rates are supposed to push up inflation.

(4) Finally, he claims that the exchange rate pressure is upwards. Hasn’t he realised that the pound is in free-fall?

I can only conclude that Gordon Brown has created his own branch of economics in which black is white and white is black.