Forget deflation. Prepare for massive inflation

Everybody and his uncle is writing about Alistair Darling’s budget, coming on Wednesday.  It’s been described (rightly) as the most important and most difficult for a generation.  Whatever he does, there is now no avoiding eye-watering levels of national debt.  The papers carry forecasts of spending cuts of £15 billion, but read the small print: that’s over two years.  But however you cut it, it’s too little, too late.
 
Most of the talk for the last year has been about the risk of deflation, and debt deflation.  A few lone voices (Liam Halligan in the Sunday Telegraph, for example) have been insisting for some time that the real problem is inflation.  Even now, as we plumb the depths of recession, RPI (inflation including mortgage and housing costs) has suddenly plunged to zero, reflecting a one-off reduction in rates on tracker mortgages).  Meantime the government’s preferred measure, CPI, still stands at 3% — requiring the Bank of England to write a letter of explanation to the government.  So with RPI non-negative and CPI over the government’s 2% target, that’s deflation?
 
Meantime interest rates are close to zero, the government has pumped billions into the banks, and the Bank of England has a programme of Quantitative Easy.  This is Labour new-speak for good old-fashioned printing money.  Shades of the Weimar Republic, and indeed of Robert Mugabe’s Southern Rhodesia.
 
As Milton Friedman famously said, “Inflation is a disease of money”.  You can create inflation quite easily (if you’re a central banker) by ensuring that too much money is chasing too few goods.  And you pull that trick by lowering interest rates to unrealistic levels, and by printing money — exactly the policies we’re pursuing.  Of course economists and the government talk optimistically about pulling back the excess money supply as soon as the crisis is over.  But that’s easier said than done.
 
I was at a dinner recently attended by a number of high-powered City figures, and we debated the current economic situation.  Their view, which I think is right, is that the government has a plan to resolve its massive debt problem by inflating it away.  Even if that’s not a formal plan, they may find they have little option.  The only other way would be politically unacceptable cuts in spending and rises in taxes.  (Note that the latter would in fact make things worse — check out the Laffer Curve).  How might individuals respond?
 
If you have a mortgage, you will find that the government is inflating you out of your debt while it inflates itself out of its own debt.  If on the other hand you have net positive assets, you have a problem.  The view of my City dining companions was that investment in property would do OK, and that equities might well ride the wave of inflation.  But gilts would be a disaster, as the government tries to sell too many, and the international financial markets lose the taste for them.  If all else fails, try index-linked bonds.

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3 Responses to Forget deflation. Prepare for massive inflation

  1. chris southern says:

    The reason goverments think inflation is a good thing is because of A, the tax revenue increase and B, they vote their own pay rise.
    If goverments had to live on the same amount of money that most people do (£10k-£12k) then they would realize that they are making the majority poorer, as well as forcing people to place their capitol into assets that are of shore in order to retain their value.

    Deflation is the market returning goods and services to their rightfull value, inflation is the goverment and central banks indirectly robbing people of their wealth!

  2. Roger Helmer says:

    “Inflation is governments robbing people”. Absolutely right!

  3. John Morton says:

    I told you this over a year ago Roger and you told me I was a lunatic.

    The thing you are not mentioning here in this great “plan” that the “government” has, is that it is no longer our government alone that is pushing this solution, it is GLOBAL.

    The G20 agreed to push IMF SDR’s as a global currency, to REPLACE the US Dollar as the world reserve currency. Not least that, but the IMF’s new policy is one of GLOBAL QUANTITATIVE EASING, i.e. GLOBAL HYPERINFLATION.

    I don’t have to make it plain how serious that is.

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