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Sunday, August 22, 2010

Inflation Scares Britain's Elite Thinkers. Why?

Turning between weekend rags, the economics subjet de moment is undoubtedly inflation.  Lord Rees-Mogg writes up his assessment that the coalition could be felled by its encroaching back into the fore in Britain.  It was not an offensive piece he wrote, and possessed more in words than statistics to persuade its readers.

But the leading article in The Sunday Telegraph business section, based on figures from Andrew Lilico, chief economist of Policy Exchange,  David Cameron's favourite think tank, was far more specific.

He quotes his thoughts that interest rates should be raised, and soon, as otherwise they will have to see 8% to head off inflation of 20%.  It seems that the inflation scare is breaking out across the media's elite this weekend.  People like Andrew Lilico are close to the government.  Is this the government's thinking also?

It is always reassuring when experts are all convinced of a certain outcome all at once.  It is invariably the moment when the thing they declare to be of the greatest danger, is no threat whatsoever.  It reminds one of the article in The Times signed by 340 economists in 1981, all declaring that Thatcher's spending cuts would cause a deeper recession.  All they did was enable interest rates to fall, and investment to lift, and the recovery to get going.

Now we find expert opinion focused on the imminent threat of another economic danger, that of rising prices, all declaring that the government must do something about it urgently.  

Yet haven't they noticed?

Houses are selling in fewer and fewer numbers across the country.  Unemployment is at an all time high (if the categories such as the millions labelled disabled are taken into account).  Shops are all complaining of falling demand.

OK. Petrol prices are still at all time highs.  But that has nothing to do with the oil price.  That topped at $140 per barrel, and is now at $73 and falling.  Gas prices into homes are still at their peak, yet natural gas has fallen from $14 to $4.  In the US, where consumers don't trust big corporations, these prices have to be reflected in retail prices on a daily basis.  In Britain, for some quaint reason, the corporations are permitted to keep the high prices years after they have passed on, when the levels only touched the highs fleetingly anyway.

We hear that the reason we are charged such high prices is the falling £.  Yet the £ is currently £1.55, well up from the £1.35 level it touched in 2008.  Is there a bit of kidology going on here?  I would say so.

In the USA, consumer inflation has been zero for the last three months.  Japan has suffered effective deflation for fifteen years, since their bubble economy popped in the 1990s.   Everywhere in the developed world inflation is falling, and is either in deflation or on the verge of deflation.

Governments all over the world are in serious debt, including Britain's.  The Telegraph yesterday totalled our debts up as being £4.8 trillion, including bank liabilities, state pension liabilities, state employee pension liabilities and general government debt.

The point that the inflationists don't get is that the gilts raised, or money printed to bail out these debts is not being added to the money supply.  The money was added to the money supply a long time ago.   What is happening now is that there is not enough supply of money to keep banks afloat, and even with the government issuing large chunks of the stuff,  none of the cash is finding its way out into the real world...as Vince Cable keeps complaining.  It is purely restoring smashed balance sheets, which shed their load into money supply in previous years.

The biggest creator of money is debt, people and businesses and banks lending to each other, and bidding up the price of assets.  In the US money supply figures are no longer published, but some estimates say that money supply is now falling by as much as 10% a year.  In Britain, the same situation cannot be far behind.  Interest rates are low, which suggests that demand for money is also low, even lower than supply.

In fact money supply is indeed shrinking on all fronts, and that includes government spending.  That is why investors see that gilts offering 3% p.a. for 10 years, and 4% p.a. for 30 years are a good bet.  By the time they come to collect their capital, prices for most things will be at much lower levels, and they will make nice fat gains, able to come back into asset markets like property or shares once the falls are over.

As asset prices fall, money supply shrinks.  Shares and property are falling.  Inflation, which fell last month (CPI from 3.1% to 3.0%) is dead as a dodo, or soon will be.  How long will it take before the commentariat and the government's advisers can spot it?

The government should not be raising interest rates as Rees-Mogg and Lilico suggest, but planning to take advantage of the windfall of collapsing longterm interest rates by building all the rail links the country needs, airports and roads.  It will help us through the coming depression, and set us up for the bounceback when it eventually comes in a few years time.

This is a deflationary era.  These experts have never seen one before.  Maybe that's why they don't recognise what they are looking at.  Britain's higher inflation is based on high tax, and regulators allowing high prices for fuels and so on where they should have been got rid of ages ago.  The British consumer is far too weak, and needs to get campaigning against these exorbitant energy prices.

The client state of Gordon Brown is what's delaying the fall in prices.  Our money is still being shovelled down the toilet.   That is all.   I think that Cameron and Clegg and Osborne are working on that now.  Let's hope, but equally let's not waste any energy on fighting the old enemy, inflation, which is in truth defeated.  The only game in town is the unwinding of the credit bubble, and the bringing of prices back down to earth.


2 comments:

Anonymous said...

Inflation will take off when the surplus countries,such as China and many others in Asia,.decide to offload their massive dollar reserves before they become worthless,by buying real assets in the USA and European countries.
Colin

tapestry said...

There is no sign of this happening. Japan is the leading new buyer of US Treasuries, and China is hardly looking at dumping them.

The Japanese are the one nation that actually understands deflation. Follow what they are doing and you won't go far wrong. Right now, they are selling gold and buying Treasuries.

Treasuries go up and down like everything else, but in the last six months they have performed well. The US$ is currently rising and the Euro/Sterling etc falling.

If deflation is coming, that trend will continue, as the world will be short of dollars to pay back dollar debt. The ECB is accumulating a huge dollar debt as the US is lending heavily to Europe to try to stop the Euro crashing.

I am going to Open Europe's talk in September - Are We Pouring Money Down The ....., Trying To Save A Sinking Ship? (paraphrase!)