and insists they are an inescapable prelude to severe inflation as
all the printed money money washes around the system. Furthermore it
will be quietyly welcomed by whatdever government as severe inflation
writes down debt so that less has to be repaid. Once again, of
course, it’s the savers who will suffer.
What he sduggests is in line with my assessment on 11/3/09
(“BRITAIN’S ECONOMY - BLEAK PROSPECTS”) except for the timing. He
thinks it will all happen quicker.
In that i wrote --- “The suggestion is that Deflation will continue
for about 21/2 years and during this period it is hoped that measures
being taken will restore the economy because during this period as
prices fall debts do not!
The follow-up to that is that with the economy awash with money from
all these stimuli that inflation is not likely, - IT IS CERTAIN!
Governments like inflation because they can borrow today and pay
back with devalued currency later. They cheat the savers with what
effectively is a “stealth” wealth tax?”
xxxxxxxxxxxxxx cs
===============================
TELEGRAPH 23.3.09
Quantitative easing is going to leave those in the know with a gilt
complex
By David von Simson
With US money supply having doubled since September, and the Bank of
England hosing money into our economy, it is surprising to read so
much about the deflationary period we are entering, with stagnant or
falling prices being a risk to be combated at all costs.
Milton Friedman and other monetarist economists would conclude that
inflation will follow as surely as night follows day. The
justification for throwing all the fuel we can on to the fire arises
from policy-makers' terror that we will follow the Japanese example
of the past 20 years. This saw every attempt to stimulate growth –
even copiously injecting money into the system and cutting interest
rates to zero – fail to avoid a prolonged period of stagnation and
falling asset prices. If prices fall, say economists, consumers will
not buy, in anticipation of even lower prices, and the recession will
deepen.
Leaving aside the illogicality of following remedies that failed the
Japanese, there are obvious flaws in the comparison.
First, much of the money injected by the Japanese into their economy
never stayed there. The "carry trade" where cheap yen were borrowed,
switched into other currencies and invested abroad, saw the monetary
effect was neutralised: the authorities were not pushing on a piece
of string but filling a leaking bucket.
Second, economists see "consumers" only as a concept, whereas
Japanese and Western consumers are very different. In the West, we
live in an age of immediate gratification. Ask anyone queuing for the
latest iPod whether it would not be better to wait six months and buy
it cheaper and they will laugh. Of course it will be cheaper, but
it's wanted now. On the other hand, the Japanese spend much more time
thinking about their old age and how to finance it.
In the course of 2009, many Britons will lose their jobs, but a much
larger proportion will still be in employment this time next year.
They will find they have more cash than they expected – fuel and
mortgage costs will be far below 2007 levels – and prices will appear
to have stood still. [This is Brown’s plan to win the election -cs]
They will quickly rediscover their spending habits.
Manufacturers and retailers, after a year of near strangulation, will
exploit the first breath of wind in the sails of the economy to
rebuild margins prodigiously. Price rises will appear as if out of
nowhere, and this will feed back into labour costs because those who
have managed to stay in work will not accept negative real wage
increases for long.
Thus in a year's time, we will have the conditions for the perfect
inflationary storm: fewer consumers, but with plenty of money, and
manufacturers and retailers having to make the same gross profits
spread over a smaller number of sales; a great amount of money
sloshing around the system; and the beginnings of a panic about the
creditworthiness of countries that have stretched to the limit their
borrowing powers. [Now which country could he be thinking of, I
wonder ? -cs]
Experts are keen to persuade us that the excess money poured into the
system through "quantitative easing" can be drained out the minute
there appears an uptick in demand. Of course, it is theoretically
possible for a fireman to pour just enough water into your burning
house to put out the fire. However, a prudent fireman will err on the
side of too much.
Former World Bank economist Percy Mistry warned: "Precipitate
contraction of consumption and investment leaves only one option:
increase public expenditures to spend our way out of recession in the
hope that, when the anticipated inflexion arrives, policy can be
tightened without killing recovery. Theoretically that's fine. In
practice it is almost impossible. That balancing act is beyond the
capacity of most governments."
Former Bank of England deputy governor Sir John Gieve said something
similar: "When the recession does come to an end, will we overshoot
the inflation target? I don't think it would be the worst thing in
the world if we overshot it a bit."
So even if quantitative easing were possible without resulting in
inflation, consider the temptation facing Western politicians. We
have lived beyond our means for a long time and our governments will
by this time next year have burdened themselves with so much debt
that it will take a generation to pay off past excesses, in the form
of high taxation, slashed public spending and reduced standards of
living. It would require the electorate to be self-sacrificing and
forgiving over a very long period of time.
The alternative is a couple of years of double-digit inflation, so
reducing the real burden of public and private debt, and
recalibrating public and private balance sheets.
Previous governments that resorted to the easy option of inflation
were vilified. How pleasant to be able to pass it all off as an
experiment in quantitative easing that got a bit out of hand. Cynics
will buy index-linked gilts.
-------------------------------
David von Simson is a managing partner of Europa Partners
Monday, 23 March 2009
Watch out for massive INflation next!
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