Wednesday, November 11, 2009

Ouptut Gap? No, Common Sense Gap is reporting that the Bank of England just can't stand some unused industrial capacity in BOE Stoking ‘Boom’ to Retrieve Lost Output, Citigroup Says:

Bank of England Governor Mervyn King said in London today he has an “open mind” on whether a 200 billion-pound ($332 billion) bond-purchase plan should be expanded, signaling officials aren’t ready to withdraw stimulus even as the economy recovers. Saunders (a Citigroup economist) says International Monetary Fund figures indicate the so-called output gap will close by the end of 2012 if the Bank of England’s new forecasts are correct.

The Bank of England said in its quarterly Inflation Report that it expects growth to reach around 4 percent in late 2010 and early 2011 if rates rise as investors expect. It took seven years for the economy to recover from the two previous recessions, Citigroup says.

“These are the strongest growth forecasts the MPC has ever published and far above consensus,” Saunders said. “The Inflation Report emphasizes the extent of the Monetary Policy Committee’s commitment to a reflationary bias.”

The output gap is a measure of the difference between the actual production of an economy and the capacity it could achieve based on its full potential. (Emph. added)

The idea of an output gap is beyond silly. There is a four-burner stove plus an oven in my kitchen. Presumably I should be cooking more foods. There is room for far more than two people in my house. Perhaps we should adopt?

When the horseless carriage started coming into fashion, there was likely spare capacity at carriage manufacturers and the like.

Sometimes homes, toasters, computers, oil, guns, etc. just get overproduced and spare capacity needs to be retired rather than utilized. The sort of output gap that needs to be filled is of new, better technologies. Think building factories to make semiconductors, Internet switching stations, etc. This is called new investment with a strong return on invested capital.

I have no idea if the policy makers in charge at the BofE and Team Obama/Team Bernanke are unimaginative, in thrall to various industries, or something else.

I just wish they would stick to traditional central banking, and to avoid central planning. I thought that the free market side won the Cold War.

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