The Bank of England's Credibility is Hanging by a Thread

18/10/2011 23:58 BST | Updated 18/12/2011 10:12 GMT

So, CPI inflation in the UK has reached a record high of 5.2% since CPI data began, matching the previous record of September 2008. This is now the 22nd month in a row that the Bank of England has missed its target - and not just by a little amount.

Whatever external forces the Bank of England blames for the overshoot, the bottom line is that for all of 2011 it has created more than double the inflation the government has asked it to. By any standards, that's an epic failure.

The credibility of the Bank is hanging by a thread. And what has been its response to missing its government-mandated inflation target for nearly two years? Its response has been to print more money -- and not just a small amount but an expansion of the UK's already bloated balance sheet by almost a third.

But is the Bank's failure to stick to the inflation target really a failure? My firm view is that the Bank of England has secretly given up on the 2% target and is actively trying to achieve annual inflation of around 5%-7%.

In doing so, its goal is to inflate away the UK's private and public debt by devaluing the pound. After all, if the Bank of England can hold CPI inflation at 7% for 10 years the value of the UK's debt will be cut in half.

What puts this argument beyond doubt is the fact that, with the CPI more than double the target, the Bank has just printed another £75bn. However big the economic hole it is in, no rational policymaking entity would do that unless its agenda was to stimulate even more inflation.

As extreme as it sounds, this course of action isn't particularly new. In fact, devaluing money to liquidate debt has historically been used by governments to get out of debt problems rather than declare bankruptcy. It is essentially a way of getting other people (especially savers and those on fixed-incomes such as pensioners) to pay for the debts of others and the government without explicitly taxing them.

Indeed, inflation is simply tax by another word, but we are conditioned into thinking of it as an accident or just the way things are, rather than a deliberate tax that we can all see and measure.

All in all, we believe high inflation is the unstated but unequivocal strategy of the Bank of England to reduce the UK's deficit and bring our economy back from the brink.