Wednesday, Jul 21, 2010
Savers Need to Decide on Inflation or Deflation
Telegraph: Inflation is yesterday's problem, says man who predicted credit crisis
Mr Kauders said: “Index-linked gilts are bad value because, if the Retail Prices Index (RPI) of inflation moves downwards, the redemption value of these gilts will also fall – unlike NS&I index-linked certificates where you are guaranteed to get your capital back.
“In any case, inflation is yesterday’s problem. What is coming next is long-running deflation, a long-term trend for prices and interest rates to fall – as they have done for more than 20 years in Japan.
“The recent increase in RPI has been caused by governments’ attempts to bail out the banks but these figures, like those for economic growth, are misleading and there will be nothing the authorities can do to prevent deflation over the long term.”
Posted by mountain goat @ 12:57 PM (1946 views) Add Comment
12 Comments
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1. simon68 said...
What is rationale in the statement “, if the Retail Prices Index (RPI) of inflation moves downwards, the redemption value of these gilts will also fall”?
Everyone knows if deflation is the scenario in future, gilts yields will fall and price will rise!
2. Crunchy said...
I will believe it when my shopping, petrol, taxes and energy bills plummet along with all the other 'realities.'
Untill then I'm set on inflation all the way. Thanks, but no thanks.
We all predicted a UK property crash but while some wait others are taking the 'realities' into their own hands and making it happen.
Rumours can be expensive and so can realities if you don't act upon them. Amen.
3. techieman said...
bit too simple simon :)
4. inbreda said...
and how sensible is the comment "a long-term trend for prices and interest rates to fall"
how far, from a starting point of 0.5%, does he think interest rates can fall? Unless they are going to start lowering interest rates in absurdly miniscule increments.
and all the glubberment has to do is print shed loads more money. This (external investors) would force them to put interest rates up, and would cause a nominal increase in prices. It would also wipe out debts. I can't imagine why they wouldn't do it. Of course it would wipe out the value of cash, so not sure about his opinions. From the comments underneath I don't think anyone is too impressed!
5. simon68 said...
The UK government do not have real intention to cut spending, no political motivation to raise profit tax, no gut to raise interest rate that will hurt bankers & BTL tribes; so inflation (stealth tax) is the only way forward.
6. techieman said...
Simon you may be right you may be wrong about what comes next BUT your point was "if the Retail Prices Index (RPI) of inflation moves downwards, the redemption value of these gilts will also fall” that this statement was wrong. Which er it aint wrong if you are looking at ILGs!
"Index-linked gilts, issued by the Government, promise to pay an income linked to the rate of inflation or deflation.
They are traded on the stock exchange and prices go up and down reflecting the outlook for the RPI - the higher inflation is expected to rise, the higher the price of the gilt.
In times of deflation, their value can fall dramatically. They are riskier than ordinary gilts, which are issued by the Government and pay a fixed income. If you invest now you could lose money.
They track the RPI downwards as well as upwards.
When [if] the RPI goes into negative territory, your capital value will fall. The prices can be volatile..."
I cant see you staying here for, say, the next two years! Unless of course the Chinese take over the world...... then again!
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7. simon68 said...
TO: techieman
I will retire soon. After retirement, I will stay 3 months here, 3 months in Singapore, 3 months in Hong Kong and 3 months undecided yet.
8. techieman said...
i meant on this site!!
9. bleakhouse said...
I think the UK could experience mild inflation over the next few years. I think our gradually weakening currency will cause import price inflation, and I think that commodities in all currencies could appreciate. If there is price inflation then wage inflation is automatic with all the government links to gov. employees, unemployment benefits, pensioners etc. A bit more QE from Swervin Mervin and inflation could be achieved, and it should be safe to assume that it will not morph into hyperinflation with the rest of the world in deflationary mode.
10. mander said...
Some predicted 2 more years of mild deflation and after hyper-inflation. In this ecuation when is the right time to buy a house?
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11. mountain goat said...
@Mander - good question, the only one that matters is how it affects decisions about savings and investment for us. My deflation views are based on the fact that we have had a credit bubble in the private sector that is deflating. Central Bank printing is trivial compared to the banks being forced to lend less, drop in the ocean. For example, last year the banks still got away with self cert mortgages but slowly regulation is catching up and liquidity is drying up. So my view is we get a Japanese scenario, the Japanese printed and printed but house prices and other asset prices kept going down for 10 years.
12. nickb said...
@11
Alas, Mr Goat, this is not the only thing that matters. Would that it were! In a debt deflation, prices and incomes chase each other downwards as credit (debt) money disappears from the economy. So if one loses ones job one is not able to take advantage of the lower house prices.
Does anyone think that buying gilts is a good strategy now, to protect ones savings, since many banks may go to the wall in a generalised deflation and depression and Government might decide not to meet it's 'guarantees' if its bluff is called? Or are British gilts too long term for that to be sensible?
Techie, you seem to be clued up on such matters...
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Nick