I would be most interested to hear the views of the readers of this blog on whether our future is one of shattering inflation or indeed price deflation.

First let me say, I do not fear deflation; the computer industry has had price deflation and improving products for twenty years, just think what you paid for that laptop with 4MB Ram in the early 1990’s  It hasn’t hurt Apple or Microsoft any.  Indeed the only people who need fear deflation are the indebted, and we know who are the most indebted in the UK ~ dear old HM Government.

But I can’t see how a fractional reserve, fiat currency is inherently deflationary, particularly when the last government and this one seem to have conjured £275B out of thin air via the QE program.  If that’s not inflationary, I don’t know what is?  Sure the velocity of money has slowed as the banks variously hoard cash or loan it back to the government via the ‘smoke & mirrors’ accounting that passes for sanity in the Treasury these days.  But the cash still exists does it not?

I have heard the argument that as bank lending has contracted (to the private sector at least) this contracts the money supply and is this deflationary and there is something to this.  But the ongoing price rises in commodities and imported goods seem to have stoked the RPI figure way above target, and HM Government don’t seem terribly concerned.

But the real clincher for me which suggest inflation is what is going on with the Euro.  Greece could be bailed out more or less as it is tiny.  But trying that with Italy, Spain and now apparently France is a non-starter.  The remaining sovereigns won’t pay much more, nor will the Chinese and the Americans can’t.  The ECB balance sheet is nowhere near sufficient for the task and so the choice is either:

• to let country after country default and smash all their national banks (surely a non-starter),
• let the Euro dissolve and go back to national currencies (the right move, but devastating for the EU project as a whole, so I can’t see it on a large scale) or,
• get the ECB to print.

And thus I think inflation, rampant and long-term as the UK engages in de facto devaluation as we also print to avoid having Sterling “over-valued”

Questions, comments, thoughts?

Single Acts Of Tyranny

Andrew Duffin
November 21, 2011 at 09:08

As ever, look at what they do and not at what they say.

My two evidence points are:

1. The Bank of England pension fund was switched largely into
inflation-proofed instruments of one sort and another, a year or two back

and

2. The inflation-linked NSI bonds have been withdrawn.

Draw your own conclusions.

2Mac November 20, 2011 at 18:10

The Economy what shall we do?

Option 1: Sustainable Growth.
Create an economic model that involves
producing goods and services that are real, exportable and in demand by other
nations and create favourable taxation to benefit Exporting Business that
inject wealth and treasure into the UK economy from Other Nations. Support
good small businesses with LEC and development councils run by experienced and
successful business entrepreneurs. Create a single Tax collection system based
on income and do not tax the poorest under 10k. Tax breaks for businesses who
employ people, start ups, etc. Reform Public Sector pensions, pay and benefits
to reflect current economic reality. Cherry pick the best immigrants. Shut the
doors on European economic migration and third world benefits tourists. Cancel
foreign aid. Bring home military to UK and spend salaries here.

Option 2: Current Policy backed by all major political parties

Pretend we have more money by saying we do, pretend we are still important
by having wars with mental third world dictators and their just as mental
revolutionaries, allow millions of immigrants to come to UK and send money
home and out of our economy, allow 50% of kids to goto Uni, spend billions on
Nuclear weapons, attend hundreds of summits where you send out the right
message.
Borrow money in the name of ordinary tax payer then give hundreds
of billions to wanker bankers, give hundreds of billion s of £ to the EU, IMF,
World Bank, ECB, Ireland, Greece, etc., allow multinational big business to
avoid taxation, tax SMB out of existence, allow energy companies to financial
rape every man woman and child in the country. Invite everyone in Asia to come
here and collect benefits, pretend 9 out of 10 jobs are not given to
immigrants, allow bailed out banks to keep hundreds of billions provided by UK
taxpayer backed borrowing and claim they cannot lend money to failed
businesses? Increase charges, taxes, fuel duty, rates, VAT and anything else
you can to bleed the last penny from UK people, join the sinking EURO and EU,
spend billions of High speed rail and Olympics and other distracting shit.

Award yourselves massive pay rises, pensions and entitlements and fuck off
abroad with your money as a new MEP and join the elite.

Options 3: Revolution
This choice in my opinion should involve helm rope
and sustainable Forests, the term “hang the bastards” would be a definite
campaign slogan and to avoid incriminating myself further I will leave it to
your imagination what I would do with politicians, bankers, councillors,
energy fat cats, trade union bosses and miscellaneous fuckwitts on my
list….Yes I have a list.

Livewire November 19, 2011 at 09:29

What do we want?
A new topic.
When do we want it?
Now!
Grumble,
whinge, moan, I bet the staff love their commenters at times like
these…
And a bit more liberte, egalite & fraternite wouldn’t go
amiss.
Actually, forget the egalite, what’s yours is mine, and what’s
mine’s me own.

There’s plenty of news to sink our gnashers in to, if the subject came up
there’d be
an unbiased neutral opinion from me about the parasitic leeches
in the public sector demanding more taxpayers’ money for doing sweet F.A. on
Nov 30th (and every other day) for example. Anna likes controversial subjects
so I bet racism in football also comes up before long.
In Old Moore’s
Almanac mode the civil war in Syria is likely to come up, as is
tobacco
Nazism; a comment in advance that trumps all other arguments is “If
nature didn’t want brats to breathe smoke in cars it wouldn’t have given them
a cough reflex”.
The battle of the sexes is bound to come up although the
only current story is a bit nasty and anyone risking humour would be
kebab’d.

Right staff, there’s your topics so get to it. I’ll help by grumbling,
whingeing and moaning as I know it’s appreciated.

Anna
Raccoon November 19, 2011 at
11:24

Give us our daily thread eh? – Your wish will be granted in two or three
minutes my son…….

Cascadian November 19, 2011 at 09:00

A picture is worth a thousand words. Zero hedge points readers to a “game”
that can be played-be the fed chairman, it could equally be called the be the
Chairman of the Bank of England.

http://www.zerohedge.com/news/friday-night-irony-according-fed-just-over-one-more-year-zirp-will-lead-3836-annual-inflation

Of course we do not know what assumptions are made and this algorithm would
specifically apply to the US economy, but just modifying the interest rate in
a similar fashion to what Bernanke is currently doing yields inflation of 38%
after 4 years. I doubt the results could be much differnt to the UK. It might
be the scariest game you ever play.

Robert Edwards
November 19, 2011 at 06:56

We already have selective hyper-inflation in portable assets, a reflection
of the dismal truth that UK plc is addicted to real estate, which is
deflating. Property prices are extremely wobbly, (and rightly so) whereas the
values ascribed to ‘collectables’ have shot up to way past their previous
highs, even adjusted for the ‘official’ rate of inflation.There is clearly a
lot of money sloshing about, but it is not spending much time in the banks;
instead, a huge amount of business is being conducted directly between
principals with little or no credit involved.

In other times, we would call this barter. There is a fundamental repricing
taking place; you can get $5,000,000 for a certain Ferrari, for example, but
you can’t give away a three-bedroomed semi oop north. Why? Because you can’t
sell a house to a Russian unless he wants to live there. Which he doesn’t.

When we had 20% inflation (entirely Socialist-generated) the solution was
simple – simply borrow the cash, which was easy. Now, it’s not. We had a major
dump in general asset prices in the last recession purely because the assets
were acquired on tick – now, it feels different…

john malpas November 19, 2011 at 00:14

If Branson got rich by working hard etc – why are not his subbordinates
either rich or idle?
Lots of people have worked hard to little advantage.
All those small business that are not there any more .Not all of them wre
asleep.

Gloria Smudd
November 18, 2011 at 20:45

I’ve said all I have to say on this here:

https://www.annaraccoon.com/politics/the-old-lady-splashes-out-on-a-new-wardrobe/

Jan v J November 18, 2011 at 19:02

Inflation – certain. “Shattering” – one hopes not.
Deflation (which, as
a pensioner living off investments – which at the moment are >40% cash –
I’d prefer) very unlikely. They’d just ‘print’ (electronically) more
money.
Whatever happens, they’ll lie to us.

Hooker November 18, 2011 at 15:33

Sterling is already down the pan. I paid the worth of 1,000 ounces of gold
for my house ten years ago. It is now worth less than 200 ounces.

Single Acts of
Tyranny November 18, 2011 at 18:54

This is a very smart way of looking at the price of things, i.e. in real
money rather than paper.

Jan v J November 18, 2011 at 20:14

Hey – depends on the time period. I’m not as rich, but:
I paid 368
ounces.
22 years later, it’s worth 143 ounces.
Lower ratio ( 5:1 plays
about 2.5:1) , but it’s still a bad deal.

binao November 18, 2011 at 13:25

As a p….d off saving pensioner, I well remember the inflation of the 70s
here, and in the 80s abroad.
My assumption is that politicians cannot
resist spending, and are hopelessly optimistic about getting spending under
control.
So inflation it is.
Mind you nobody knows what’s going to blow
out of the euro pressure cooker. My own suspicion is that Germany will do all
it can to avoid devaluing whatever neu form of euro* it engineers. So we won’t
be playing beggar thy neighbour with that. *will they call it the neuro?

Jan v J November 18, 2011 at 19:06

EuroMark? NeueMark? Reichsmark – oh, wait ……

Bugger (the
Panda) November 19, 2011 at 10:42

NeutEuro

It can be in two places at the same time, if it ever does really
exist.

CheesePlant November 18, 2011 at 10:31

I still can’t figure out how we bailed out the banks by borrowing money off
some ‘bank’. But aside from that, when deemed necessary the powers that be
come up with something to put common man back in his place (be it world wars
or whatever), this is all that’s happening. The likes of Richard Branson get
richer, everybody else gets poorer.

Engineer November 18, 2011 at 12:13

Richard Branson started out with few qualifications, but he worked damned
hard, took some risks – some of which paid off – and has continued to work
hard. Good luck to him; his companies provide a lot of employment.

Those who just lounge about and complain that it’s all somebody else’s
fault will probably end up bitter, twisted and unsatisfied. If you want some
luck, get stuck in and make your own. When you get knocked back (and you
will, we all do) pick yourself up, dust yourself down and get right back on
with it. Look after yourself – don’t expect others to.

The idle rich aren’t, and the working class don’t. That’s the basic
summary of today’s Britain.

CheesePlant
November 18, 2011 at 14:35

Richard Branson started out with a rich mummy and daddy who paid off
his tax bills when he tried to avoid paying his tax.
And now he buys a
bank off us at 400 mill less than we paid for it. Probably underwritten by
cash from RBS. Who owns them? Yes, he’s created jobs but without him there
would be more jobs and the few hundred million he has stashed away would
be seen by more than just him.
Pull your head out of his ar5e
nobby.

CheesePlant
November 18, 2011 at 14:40

Engineer, as I suspect you work for RB himself or some other equally
as nauseous, no doubt you’ll print the above out and go squealing to
somebody about it. The above therefore is all alleged and not my opinion
at all.

Engineer
November 18, 2011 at 15:48

Never worked for him, or any of his companies.

How many jobs have you created, then?

Gallovidian
November 18, 2011 at 14:45

Perhaps those idle rich cunts could stop importing cheap foreign
labour, sabotaging industry with their pro-City bias and shitting all over
our education system with their Frankfurt School crap in an attempt to
destroy the Britich working class? That might help.

Apologies for the bad language, just pretend it is a Guardian
article.

Engineer
November 18, 2011 at 15:50

If you want to do well for yourself, get off your backside and make
it happen. Don’t blame others.

Barry Sheridan
November 18, 2011 at 09:35

Anna, high inflation is unlikely, market pressures will topple the
government long before that, bringing in the IMF to do what our own politico’s
cannot find the courage to achieve. Much more probable is a period of
sustained inflation high enough to erode much of Britain’s debt while at the
same time gradually scaling back the standard of living Briton’s have enjoyed
over the last couple of decades at a rate that does not provoke serious
unrest.

As for the future, well it will be difficult. It is obvious that for some
considerable time (almost a century) that Britain has been reluctant to make
the most of itself, yes, we have plenty of hardworking talented people, but
increasingly they are weighed down by growing numbers whose sense of
entitlement knows few, if any boundaries, and a political class obsessed with
the idea that they and they alone know best. Although you cannot entirely
blame the elected representative, after all you get the government you
deserve, far too many Briton’s having failed to take any interest in what has
been done in their name.

We need to reinvent ourselves, but that is unlikely given the calibre of
people who have gained authority. For every Richard Branson there are a dozen
or more whose contribution is effectively nil. It is all very sad! Sad
especially because the support for the policies that have delivered us to this
state has rarely wavered. Any who have tried to introduce reality becoming the
target of much vindictive nastiness. The outstanding example here of course
being Margaret Thatcher.

davidb November 17, 2011 at 23:03

Scrap metal fetches historically very high prices with no real signs of
abatement. Despite the slowdown in Europe and the USA, oil is still over
US$100 a barrel. High prices for food are being driven by demand in Asia. Have
you noticed how shockingly poor quality the fruit is just now?

So why does the B of E imagine deflation is around the corner? We had the
deflation when all that cheap stuff came in from China at the turn of the
century- often at fractions of the UK made prices. The last lot chose to use
the opportunity to ramp up a house price bubble and rode the wave of pretend
prosperity to 3 election wins. And there was me and a few others I know like
little canaries in the mine wondering how such a successful economy needed to
borrow money, and watching my customers factories being transformed into
Tescos and blocks of flats, as the crafstmen were paid off their skilled jobs
to find minimum wage alternatives ( and lots of Polish competition too).

We import everything. We are at the mercy of foreigners to supply much of
our food and most of our consumer goods. So we will be importing their
inflation., which I hear is in double digits in Cathay.

Deflationary pressure? Not a sowballs chance.

Gallovidian
November 18, 2011 at 14:40

Well said.

john malpas November 17, 2011 at 22:55

What if the government sells everything – NHS, Education , citizenship,
military etc. Should make a bit of cash.
After all it is basically a
reasonable country – someone would surely want to buy it.

Cascadian November 18, 2011 at 01:38

Liebour already did that with PFI.

Cascadian November 17, 2011 at 22:48

I hope the landlady won’t mind me directing traffic to other sites, this
being after all a fairly specialized subject. I do so because this subject
more than any other we normally discuss has the ability to throw us all at the
door of poverty.

For those with an interest in these matters a good source of economic
commentary is zero-hedge, you will not see the subjects discussed there enter
realm of the MSM often, and if it does there is usually a lag of a week or
more. Our good friend Demetrius also puts up some prescient and more
accessible posts.

To avoid any doubt of the seriousness of our predicament, this commentary
on the US makes the point about bank insolvency, and shows the governments
equal disregard for its taxpayers. http://news.yahoo.com/next-financial-crisis-hellish-way-204303737.html

Cascadian November 17, 2011 at 22:25

When the Bank of England pension fund is 95% invested in
inflation-protected investments you can safely bet you are going to get
inflation, the question is how much?

Since most banks are insolvent at present, they hope that the governments
will continue their low interest policy where they get money at 0.5%, pay
savers even less and invest to hopefully get a return of 5 or 6% until they
can claim to be recapitalized. I suspect they need at least another year of
that malarkey. Meanwhile in the real world inflation clips along at a reported
5% (nobody who has paid bills or gone shopping believes that).

In reality the confidence and goodwill in fiat currencies is hard to
maintain and people are rushing for the exits, French, Italian, British and
Spanish (FIBS-they are all telling lies) banks are teetering on the edge, it
will not take much to start a bank run. That scares the bejeesus out of
politicians, so they will print money like crazy to “stabilize” the system. I
would not be surprised to see 20+% inflation across Europe within a year. In
reality I believe you are halfway there, certainly for households that rely on
interest income for their pension the double whammy of lost earnings and
inflated household budgets is approaching, perhaps exceeding 10%.

Single Acts of
Tyranny November 17, 2011 at 21:43

Inflation (from memory) topped out at 26.7% in the 1970′s

Somersetman
November 20, 2011 at 08:56

I left school is 1979 and well remember 25% inflation. Page increases
every 3 months and nothing ever being the same price very long………but we did
work our way out of it. Strikes were reduced, exports were made and money
was earned. The calamity seems to have been that we (Government, business
whoever) chose to back the financial services horse forgetting that to feed
that horse you need a real economy too. Let’s design stuff, make stuff, sell
stuff make profit, rinse & repeat.

Engineer November 17, 2011 at 20:14

Like everybody else, I suspect a period of inflation. The BoE may be aiming
for inflation around 5 to 6%, trying to avoid it reaching the 10% plus that we
suffered during the ’70s and early ’80s.

I wonder if the concern about bank lending to businesses having slowed is
because they were lending all too freely before 2007. Consequently, a return
to more normal business practice will appear to be a significant slowdown.

There seem to be more and more people suggesting we are in for a prolonged
period of slow or no growth, so deficit reduction by expansion of economies
looks less and less a plausible policy. The only way out of this mess is to
roll our sleeves up, build a lot of solid, genuine businesses, and avoid
personal and business indebtedness like the plague.

Government has to find a way to more nearly match spending to tax revenues,
so it may well have to resort to some real cutting, rather than the somewhat
cosmetic reductions in spending increases we now have. Inflation will make
that worse, of course, but until the budget is balanced, we can’t really start
to talk seriously about National Debt reduction, so the pain being inflicted
on savers at the moment will be doubly ineffective.

Since it took over a decade to build up the debt levels to the point of
unsustainablity, it’ll take as long or longer to eliminate the toxicity. With
inflation and not much growth for some time, things may not be too much fun
for a bit, but we survived the problems of the ’70s, and we’ll survive
this.

Pompey Cowboy
November 17, 2011 at 19:00

BBC view— its the worse crisis ever and its all the Tories fault. The
Greens should take over
Working mans view—- We’re F*&ked
Green Party
view– its all the car drivers fault, but maybe once the UK is wrecked we can
take over– every one living in a tent with no heating and lots of woolies. Of
course if a party members wants to jet off and do research in nice places
thats ok. Everyone can live in a big commune in Brighton paid for by the Tory
Rich. Labour rich are good people so shouldnt have to pay.
Labour View— its
all the Tories fault, we cant remember anything about the last 20 yrs . La La
la I cant hear you
Lib Dem View– La La la — I cant hear you!
Inflation ?
deflation? , we were suffering a bit of deflation at the moment in some ares
and inflation in other areas. Workers wages are repressed but prices in some
sectors are going up ( fuel for example). I think we will bump along the
bottom for a while until we realise that the Billions thrown away in Climate
Change and the EU scams are useless. We should be upping the game and joining
the BRICS countries. Britain can be Great!

Mark November 17, 2011 at 18:59

I’m for inflation, just because there’s an awful lot of money getting
invented

Antisthenes November 17, 2011 at 16:56

Stagflation then depression followed by quasi poverty followed by real
poverty. Don’t worry though in 20 years time we will become a developing
nation as industry floods from East to West to take advantage of low labour
costs.

Livewire November 17, 2011 at 16:35

Inflation as the real value of money drops.

However, we didn’t reach the top of the evolutionary pyramid without
acquiring adaptability.
Massive energy price hikes due to Huhne etc ? Get a
multifuel stove and burn fallen branches or driftwood.
Food prices? Grow
your own and keep chickens.

The downside is that any physical threat to wellbeing usually falls hardest
on the very young
and the very old who don’t have the physical strength or
the skills needed. Fortunately philanthropy covers that one, although chilling
accounts in books like The Gulag Archipeligo show that in extreme
circumstances philanthropy to non-relatives disappears if people are
malnourished or in danger of freezing to death.

If it got that bad, and this sounds like a survivalist comment, you’d have
to defend your food and fuel stocks somehow, possibly from a government that
stirred up hatred against ‘food hoarders’ (kulaks).

Actually, the trade cycle (‘boom & bust’) has been around since
mediaeval times due to
the combination of human nature and economies beyond
simple bartering.
I doubt if the ‘doomwatch’ scenario above will happen,
despite the tendency of politicos from Westminster to ‘Wipers’ (Ypres) to
fiddle while Rome burns (a triple pun !; as in Nero, expenses-fiddling, and in
some cases another sort of fiddler).

Demetrius November
17, 2011 at 15:06

Because we are now in the Age of Digital Money (see my yesterday’s
explanation of the theory of this) nobody at any level really knows what is
going on, why or what the consequences are likely to be.

Back Seat Driver
November 17, 2011 at 14:54

I’ve been trying to figure this out too and can’t make up my mind. From
what I’m seeing (anecdotal evidence only) it would seem that
producers/manufacturers etc are experiencing a period of deflation in the cost
of some inputs (in others they are suffering the same problems as coregualre
consumers, but on balance I think that they are getting inputs cheaper than
they were). Also I think that they are suffering lower demand for their
finished product and as a result they are having to offer new and better
products or find better and more efficient ways of producing, but defintely
cannot raise the price.
Consumers are experiencing a period of inflation
as, instead of prices staying the same or going down (or getting more for the
same amount of money as with the computers example cited), it seems that
taxes, duties and other costs are being added to the price the consumer pays
thus increasing the overall price. So to the consumer it feels like
inflation.
Where will it end? I wish I knew…
interst rates will have to
go up at some point to attract enough capital to pay for all this QE. On the
other hand, there is no growth and the I’m not sure where the QE money is
going, but it doesn’t seem to be making it’s way out into the general economy
(just to a select few politicians and quangocrats), so there is no pressure to
increase rates.
All the major currencies have issues so where do you park
your cash if you have any? The only options I can see are Canadian dollar
and/or either Australian or NZ dollars, which is really not much use to anyone
trying to live a normal life here in Europe.
Also, perhaps very
conservatively, it is a good time to “neither a borrower or lender be” Sorry
that it’s out of context, but I really do think that it is a bad time to have
too many loans outstanding and also to have too much money in the bank
(effectively lending them your money).
If anyone has any ideas I’m eager to
hear them!

foundavoice November 18, 2011 at 05:28

Singapore Dollars.

Hopper November
18, 2011 at 06:22

Councils are turning off street lights to save money, so lamp posts are
surplus to requirements. Buy up rows of them for a song, the council will
welcome the cash. Invest in hemp rope (or jute may be cheaper). When the
consequences of the politicians’ current actions become apparent, you will
be able to rent out your investments to the local populace, video the
resulting spectacles, publish it on Youtube and retire on the advertising
revenue.

Jeremy
Poynton November 18, 2011 at 11:48

I believe piano wire is the chosen material for politicians.

Michael
Fowke November 17, 2011 at 13:54

I’m pretty sure we’re heading for massive inflation, what with all this QE
nonsense. Not exactly fair on all the people who have done the right thing
over the years, is it?

Graham
Eardley November 17, 2011 at 12:22

If we continue to spend all the money that was saved by the comprehensive
spending review on bailing out (giving loans to) Ireland and are going to have
to have more QE as has been said in previous comments even though there was a
slight fall yesterday to 5%. I think the govt. is stoking up Inflationary
pressure on the economy.

JimS November 17, 2011 at 11:31

I’m afraid I don’t believe anyone is an expert on the subject of money as
currencies have become totally disconnected from tangible assets.

Capitalism hasn’t failed; the idea that savings or ‘capital’ can be
invested to produce an excess or ‘return’ in the future is still valid, it is
just that real savings have been replaced by imaginary money written down as
‘debt’. This is a classic pyramid scam which works as long as people accept
the ever increasing stock of imaginary money and never try to match it to real
assets.

The money markets don’t care what happens as long as deals continue to be
made, they detest stability, what they crave is trading volume.

Ed P November 17, 2011 at 11:23

QE alone will surely result ultimately in hyper-inflation, so we’ll need
million pound notes just to buy a cup of coffee, like in Zimbabwe. Savers are
being sacrificed to protect banks.

Simon Cooke November 17, 2011 at 11:01

Inflation – indeed I’m pretty convinced that there has been a sort of
benign acceptance by central bankers that as Martin Sorrell put it “I get the
sneak feeling that the West wants a bit of inflation.”

There are three ways to deal with debt – pay it off, don’t pay it off or
inflate. The current strategy appears to focus on the second and third of
these.

What bothers me most is that we are employing the same policy tools
(increasing money supply, low interest rates) to solve a problem that was
caused by those very same policy tools.

Pompey Cowboy
November 17, 2011 at 18:44

Well said