'This is the recession that the Bank of England yesterday has said it wants, in order to get prices down (for its own sake).' I may have misunderstood this, but why do you say it's for the BoE's sake? Isn't it for the sake of savers who will soon see their £100k nest egg reduced to £80k, or workers who, for the most part, will be getting lower wages in real terms?

Is it your view that inflation is going to fall back to 2% without any action by the BoE? If so, why?

Also, we are almost certainly already in a recession despite the BoE having done no QT at all until about a week ago (and even then, only a token amount). A recession has seemed nailed on ever since inflation hit double digits and retail energy prices doubled.

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We can't choose to avoid more expensive stuff if it comes from stuff getting harder to get hold of (i.e. it's from input costs or another supply side shock). Changing the number of zeros on it doesn't make any difference either way. We're poor because of real factors, not because of Bank activity. We can see this by looking at NGDP growth: if it's above trend, the Bank is inflating; if it's below trend the Bank is deflating. Inflation is misleading because it's driven both by Bank activity and real world activity; NGDP is totally within their control.

It's like subsidising fuel. It may make the consumer pay less, but it hasn't got any less difficult to produce so in real/relative terms (i.e. relative to wages) it'll still get more costly, whatever the Bank does to deflate.

However, if we go through a big recession then we're going to lose a helluva lot more wealth than a bit of inflation. Most savers own stocks. These all tank before recessions when they get priced in. Homes are people's biggest asset, these will fall substantially. If I am right and a recession is the cost of tightening substantially now, then clearly it's net bad for those savers, notwithstanding the inflation.

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"NGDP is totally within their control"

No, I really don't understand this What specific levers does the Bank of England have to exercise total control over NGDP? And what effective punishment can the Treasury apply to ensure they shake up and do their job when they fall outside the margin mandated?

I realise NGDP is not GDP, and there's some magical thinking around measuring it anyways especially in regard to government expenditures and imputed incomes, but seriously, the BoE has this totally in their control in your view.

As an extreme thought experiment suppose I had a shed where I invented two things - a drug which I could administer to every politician to make them a planning liberal (NNRs, LNRs, SSSIs and Listed buildings excepted) and a technology to combust hydrogen safely and more quickly than fuel cells, how would the MPC of the Bank of England take sufficient money out of the economy to keep up. They wouldn't even have thought it until Tyson lower prices smashed them in the face.

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Hi Andy, sorry I didn't see a notification for this post.

What levers does the BoE have to control nominal GDP?

Well it is authorised to print as much money as it likes. It could buy up every bond and equity in the UK if it liked. It could move onto buying property if it wanted. And eventually it could buy and hoard foreign currency. I think that shows how they can create as much inflation as they like on the upside.

Reducing inflation is slightly harder but not that hard. They can 'unwind' any QE they have done. They can create a new Bank note, remove the legal tender on the old ones, and require people to return their old ones for the new ones, plus impose extremely high interest rates through the Discount Rate. I think they could generate pretty severe inflation this way, driving NGDP growth down very low (but perhaps not arbitrarily low).

Do you dispute either of those?

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Thank you for the reply Ben. I think I've understood 1/2 of this, perhaps more. If there's a recession, real GDP down, but any amount can be printed to devalue the currency to meet the NGDP target. If there's a boom, and the BoE doesn't hold any QE bonds that they can sell because government has run broadly balanced budgets for many decades and they've all matured then the BoE can use high interest rates to increase the value of the currency and bring NGDP back to target.

Ok so far, but if you've just taken out a mortgage you're going to be up the creek without a paddle compared to renters if some new technology comes along (safe H2 combustion, nuclear fusion as examples) that massively reduces the cost of living and increases real GDP from activities that previously didn't happen because energy cost too much. In addition mortgage holders would resent a population shock (say UK giving unlimited work permits) as that would increase real GDP too, although GDP/capita may not budge much.

What was the reason for the theoreticians choosing NGDP over NGDP/capita? Not expecting you to know but curious if you do know the reason.

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