Monday, Mar 23, 2009
It’s inflation you should fear, not deflation
MoneyWeek: It’s inflation you should fear, not deflation
House prices and the RPI may still be falling, but deflation isn't what we should be worrying about. An explanation of why the big danger could now be inflation.
Posted by damien @ 11:34 AM (1946 views) Add Comment
39 Comments
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1. montesquieu said...
Just in case anyone forgot what inflation was like ... my company just announced no pay rises across the board this year. Back in the 70s and 80s, those without trades unions to fight for them suffered exactly this, a real fall in incomes and living standards while housing debt was inflated away.
This time round there are no trades unions left except in the public sector and in a few high-profile places like power stations and transport. So expect a real fall in living standards while those still with the power to force pay rises inflict misery on the rest of us.
2. crunchy said...
1. montesquieu.. Damn right!
crunch- It's not inflation we should worry about it's hyper-stagflation which will be intensified by BOE brave printers and lame rate setters.
3. crunchy said...
They will further cripple the economy in a so called attempt to revive it.
It's now the race to destruction. Most will be begging for the ominous world solution!
4. last_days_of_disco said...
What are the other options?
Deflation? Hyper inflation?
The politically powerful will crush the politically impotent. There is really nothing we can do except become more politically powerful and push against measures that are design to enslave. This idea that somehow everyone is going to be looking out for each other is what got us here. Its a lie, it never was true, the downturn is just exposing things for what they are.
Join a political party, influence their policy. Stop voting for people who hate you. Any other ideas?
5. Maddison said...
Inflation is so personal. I have been annoyed how prices have risen on utilities and food etc and such low interest rate on savings but I had to buy a scooter the other day as mine went phut and I was astonished how cheap a new one was. £800 cheaper than I paid 3 years ago. This has made up for all the cost rises to me over the past 2 years!!
6. happy mondays said...
last_days_of_disco said...Any other ideas?
phone the samaritans!
7. japanese uncle said...
At least FTBs are better positioned as house prices and rents will drop dramatically, though grocery costs are rising. I recently target 'reduced to clear' items, as many of them are just fine. Loaf of bread is 7p while 2 pints of organic milk is 43p. No inflation as far as I am concerned.
8. japanese uncle said...
It's so easy to dupe the ignorant millions into believing it's deflation or inflation just by switching the reference index from RPI to CPI or the other way round.
9. uncle tom said...
Moneyweek seems to have a vested interest in gold trading, as they tout it with tedious regularity.
My concern with gold is that governments don't really need it anymore, and might start flooding the market as they scrabble to make ends meet.
Aside from that, the article is correct when it points out that deflationary influences are pretty much played out. The British don't 'do' pay cuts, especially in the public sector, so there's no prospect of an on-going deflationary slide.
So what WILL happen?
The UK funding gap is horrendous, and now that the BOE has embarked on a course of devaluation, it will become even harder to roll over debts to overseas lenders. Therefore we will see more 'QE', Sterling will fall even lower, and imports will become ever more expensive.
However, this will make UK businesses more competitive, will breathe a little confidence into the stock market, and a bull market is quite likely. However this will be at the expense of gilts. As stocks rise, gilts will fall, and interest rates will be forced up.
Businesses like my own, are taking a big hit on profits at the moment, as competitors fight shy of passing on the dramatic increase in the cost of imports resulting from Sterling's fall against the dollar. However, this can only be temporary. Margins will be re-built, and prices will rise. Hello inflation..
Inflation will burn down both negative equity and sovereign debt, but interest rates will go painfully high, with interest on mortgages likely to average over 10% - even 20% is possible - a huge strain for many over-borrowed home owners.
What will the government do?
Brown and co. will be deserately trying to paper over the cracks until the next election, and will fail to take the decisive action needed to tackle the current problems. Unfortunately, there is little evidence that Cameron is ready to grasp the nettle either.
Both parties will be concerned with courting a tiny slice of the population - retired swing voters in marginal constituencies.
If that's not you, then tough..
10. str 2007 said...
I take in UT that although you predict strong inflation you are still bearish on house prices and don't see houses as a good hedge against inflation ?
11. crunchy said...
6. japanese uncle ........ Alot of housing associations are raising rents circa 5/6% with the option of surrendering tenancy if not willing to comply. Commodities will rise in the near future with additional investment money sloshing around. Wages will remain static or decrease with fewer hours to work. We have not seen the full effects of quantitive inflation feeding through yet, or currency devaluation.
Smart price will be the same as named brands before long and that is without the possible effects of increased shoplifting together with future commodity shortages.
STAGFLATION I think.
12. Mr G said...
UT said: "Both parties will be concerned with courting a tiny slice of the population - retired swing voters in marginal constituencies"
I'm retired and a swing voter in a marginal constituency.
I don't envisage either Crash or Dave putting forward policies that will be advantageous to me.
Either way, it will still be a case of "you've been prudent, so tough, you're on your own chum, we've got to look after those who've taken out stupid mortgages, blown it all or p*ssed it all against the wall"
13. flashman said...
UT: "The British don't 'do' pay cuts, especially in the public sector, so there's no prospect of an on-going deflationary slide".
Of course the British 'do' pay cuts. It's happening all over Britain right now and it is a racing certainty that there will eventually be spending cuts in the public sector.
"Margins will be re-built, and prices will rise. Hello inflation"
Not if demand falls. It doesn't matter what the prices are because unemployed people cant buy anything. The resulting fall in demand will ultimately lead to lower input prices as well
14. flashman said...
str 2007: I hope you loaded up on Sterling after my rare tip? It's been party time today.
15. crunchy said...
Unemployed people live on the minimum if they can't buy they will have to steal and perhaps pay a fine or do community service when caught from time to time.
Some deterrent!
16. japanese uncle said...
flashman
You may well be right. Wages will have to come down, first unprotected workers in the smaller private firms, then bigger firms and ultimately the public sector workers. 'When the money is gone, it's gone' will be true here. Money printed by BoE will be sucked by the banks and foreign lenders.
'We will be seeing more of the 'creeping deflation' which according to my definition, means, nominal prices remain the same or gets lower, while the quality deteriates more badly under the surface. Consumers with keen taste can notice the quality of coffee has deteriorated over the past six months, though the packages remain the same. It's understandable. Given the massive GBP depreciation, they cannot possibly maintain the current prices otherwise, let alone lowering the prices. Soon you will notice 100% silk ties are being replaced with 50% silk 50% poly ties silently.
17. greytornado said...
Although it is often thought that gold is irrelevant nowadays, (Uncle Tom), - it should not be forgotten that it is still money - it's worth noting that the Nazis were only able to carry on WW2 in the late stages because they had gold. Anyway - if it is so irrelevant, how come the Chinese are anxious to increase their 600 ton holding? Could it be that they think that all the billions of dollars of Western Currency they hold might turn to rats?
18. str 2007 said...
flashman
I've got plenty of Sterling, but some Euros and Gold aswell (which haven't done so well today) D'oh.
Is this a long term 'long' on Sterling now, or were you just dipping in and out ?
BTW 'The New Market Wizard arrived on Friday, Techiemans recommended read. Good book, only a couple of chapters in so far. Highlite to date is Bill Lipzchutz recanting a tale of loosing $30 million in a short DeutchMark position back in 1988 - in eight minutes - and spending the next day chasing the sun trying to recover some of his loss.
19. crunchy said...
Not a mention of last weeks oil rally. lol
The forgotten gem.
20. flashman said...
str 2007: just dipping in and out but I will be going long whenever I see an opportunity. It looked so juicy on Friday. I have read very few trading books. When I started I had the benefit of being taught, one on one, by some pretty great traders so trading books weren't really on the menu. I think Techieman trades on his own and had to teach himself (technical trading) so he probably knows all the best books
21. flashman said...
hey crunchy: was there some sort of oil discussion. What did i miss?
22. str 2007 said...
Flashman
What was it that specifically made it look so 'juicy' on Friday then as a matter of interest ?
23. str 2007 said...
Crunchy
I could be wrong here but didn't Oil go up last week more as a result of the $ going down, which oil is priced in ?
24. crunchy said...
19. flashman Yes, last week!
Thought it worth mentioning again. : )
25. crunchy said...
21. str 2007 Yep!
26. crunchy said...
and...........http://www.rep-am.com/articles/2009/03/20/news/doc49c3e9975d975458368357.txt
27. str 2007 said...
Sorry Crunchy you've lost me there
What has a story about 2 boats colliding got to do with oil or the dollar ?
28. crunchy said...
It was the AREA, spooked the market for an extra lift past $50.
Does not take much.
29. uncle tom said...
str 2007,
Yes I am still very bearish on residential property, although commercial property is just beginning to look attractive. I'm toying with the idea of buying a pub or two when interest rates kick off, as a long term investment.
Flashman,
Yes, there are isolated instances of people taking pay cuts, and people who got used to getting bonuses are going to have to get used to not getting them; but the great majority in the private sector will not see their basic pay cut, while the public sector has no history of accepting wage cuts, and is not likely to change that attitude in a hurry..
30. amjidk said...
http://www.marketoracle.co.uk/Article9594.html
31. amjidk said...
Hi Guys slightly off topic but would really appreciate some advice
I noted today that the value of gold in pounds has dropped since the pound has appreciated against the dollar, i am a little worried that if the dollar falls a lot further say by 50% the value of my investment will halve, is this correct and also if i by some gold in the new york vault, will this counter the threat of dollar devaluation..
is it similar for oil??
32. flashman said...
str 2007: I wish I could give you a complicated sounding explanation. We decide on a general direction for the week, based on fundamentals and gut instinct, then I stare at the screen until it looks juicy. I hope you're not disappointed!
33. letthemfall said...
uncle tom
You could call your pub business Uncle Tom's Cabins.
34. crunchy said...
flashman said...... "then I stare at the screen until it looks juicy. I hope you're not disappointed!"
crunchy- It's not what you trade, it's what you don't trade. I think they call it waiting for a SET-UP!
35. inbreda said...
amjidk - the value of your gold did not drop - it is still gold. You are worrying about the relative movements of paper money against each other - and all of that could quickly become worthless.
36. amjidk said...
33, thanks inbreda,
(btw i purchased it via bullionvault) are you saying that if the dollar collapses, then my gold will still be worth the same??? sorry if it sounds like a stupid question.
37. holding out said...
amjidk - If the dollar collapses then the price of gold in dollars will shoot up. But the price in other currencies will not (assuming they remain stable). More to the point if the £ collapses the price in £s will shoot up. Bullion vault actually provides thegold price which you can look at in various currencies/time frames.
38. disillusioned said...
"7. japanese uncle said...It's so easy to dupe the ignorant millions into believing it's deflation or inflation just by switching the reference index from RPI to CPI or the other way round."
You're right of course. It occurred to me recently how easy it is for politicians to pick and choose their figures for inflation and ALSO their definition of inflation (as mentioned in this article - money or goods) to aid their scheming lies.
Also, doesn't the article get it wrong when it says that the reason we won't do 'a Japan' is because most of the downwards pressure has no-where left to go? Surely Japan was in the situation of interest costs which couldn't really go much lower; petrol prices hovering at their current bottom; heating costs hitting a bottom; and food too?
39. str 2007 said...
flashman @ 3.53
No, good to know that's all there is to it !
Now where's my book on fundamentals and juiciness ?