Thursday, March 26, 2009

Inflating Our Way Out Of Debt

It has become apparent to commentators like Liam Halligan that the Great Deflation Scare of 2009 is, in his words :

"... largely a myth – an alibi for wildly expansionary fiscal and monetary policy concocted by Western governments and their media lackeys.

After all, where is deflation? Data released last week put annual US core inflation at no less than 4pc. So why is the Fed doing this, following the Bank of England's lead? Because the real solution – forcing banks to face the music, while rescheduling massive private and public debts – is too politically frightening for our so-called leaders to contemplate.

A decision has been made, but not announced: we'll inflate away our debts instead"

Media lackeys ? That's a bit strong. Anyone in mind, Liam ? Robert Peston's been waving the spectre of deflation for some time - as has the entire BBC news output.

I invite readers to study the evolution of Tuesday's lead BBC news story, from "Deflation risk as prices to fall" all the way through to "Surprise hike in consumer prices". Bloggers like CityUnslicker and Alice Cook were far more on the ball than the mainstream media.

It turns out that the only component of inflation to fall is mortgage costs - completely under the control of HMG/BoE. Everything else is going up. The only deflation is caused by the Government - and then they've used the spectre, aided by their "media lackeys", to start up the printing presses. Peston's December comment that "The US Federal Reserve and the Bank of England regard the great threat right now as deflation" remarkably ignores the parallel appreciation of the dollar and depreciation of the pound. In David Bowie's immortal words "This is not America".

To be fair, the inflation's caused by HMG too. The weakness of the UK economy, the government's massive and increasing deficit as tax receipts collapse, the fact that they spent in the good times and have nowt left for the bad, not to mention the announcement that the presses would roll - these have devalued the pound by some 28% since last summer. It's this that is driving inflation, given that we import a lot more than we export.

We're actually 1.2% above the BoEs official (albeit fiddled) inflation target of CPI at 2% - so they should be raising interest rates. I wonder why we're not ? And RPI stood at 0% in 1960 - did we start up the presses then ?

Bloggers like Matt T suggest I'm in danger of succumbing to conspiracy theories. I always try to use Occcam's Razor when presented with such a thing. For example, the UK cultural collapse can be explained quite neatly without bringing in any Zionist plotters or master-plan of Antonio Gramsci's.

But printing cash makes logical sense (from Labour's perspective). They won't/can't stop spending - I'm sure Polly Toynbee would argue that the State is needed more than ever in these hard times. Just like Mugabe's soldiers, the key client groups need paying. Tax receipts will continue to fall. The pound will really take a hit, and HMG won't be able to borrow, if they run an even greater deficit, as even Mervyn King has warned. Where else will they get the money from ? I really can't see anywhere.

I was expecting the FT to fall to maybe 2500 this year - but since then it's risen from about 3400 to nearly 4000 as Brown and Obama print away. Whether this is a bear rally and prices will resume the downward trend is yet to be seen - but there can be little doubt that all this newly-created dosh will in the long term cause asset prices to rise again, and my pension to be devalued, as the bubbles are reflated. It's all a question of timing. When will inflation kick in ?

(a shorter version of this was posted yesterday at Biased BBC)


Anonymous said...

With the destruction of private pension schemes started by Brown and on going, and with huge inflation in the pipe line wiping out any other savings, and a government up to it's eyes in debt, may be even defaulting on public service pensions and standard pensions, we will all have to look to our kids and grand kids for some level of support in our old age. This may be a problem for those with out any. After which we may see an increase in the birth rate as people once again have to look to their offspring to look after them in old age.

Anonymous said...

Just to back the BBc deflation propaganda.

Heard a snatch of You & Yours the other day, one beeboid to another, "So, how will deflation affect us?".

One of the papers also ran a story (Express?) this week: Deflation, but prices are going up.

Er, right, so not actually deflation then.

Anonymous said...

"Where else will they get the money from?": like Argentina, they'll nick our pension funds. Remember that Peronism is just Old Labour without the pro-Soviet element.

vlc said...

I don't agree that inflation is inevitable here. If production capacity does not deteriorate much then inflation will be very muted.
Question: Since they've now created more money than would have been collected in tax revenue; would it not be a more efficient stimulus to just tell us all that we have a 100% tax discount for say the next three years?

Rob said...

No-one seems to be remarking on the effect a cut in VAT of 2.5% has had on inflation. What happens when that cut is reversed, as it has to be at some point?