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Inflation Is The Greatest Danger To The British Economy


Methinkshe
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At the risk of sending everyone screaming for shelter, here is another article to add to the inflation/deflation debate.

Inflation is the greatest danger to the British economy

Deflation is being used as a spectre to cover a power grab on the Bank of England and the failure to force the banks to come clean, says Liam Halligan.

By Liam Halligan

Last Updated: 6:44PM GMT 21 Feb 2009

On BBC Radio 4's Today last week, I was accused of being "bonkers". That was after I argued the UK faces serious inflationary dangers – not least due to the impending use of the Bank of England's printing press. My concerns that our "borrow-more, spend-more" bail-out will make a bad situation worse were similarly dismissed as "absurd". Allow me to explain why the real issue is inflation – and not the deflationary spectre that's been conjured up to scare us. Allow me to outline how to escape this crisis, the path our politicians should be taking, rather than their current disastrous course. Then you, dear reader, can judge who is "bonkers", whose reasoning is "absurd".

UK interest rates have been slashed to 1 per cent – a 315-year low. Our budget deficit is heading for a colossal 10 per cent of GDP – bigger than the shortfalls that saw the UK go "cap in hand" to the International Monetary Fund in the mid-1970s. Government borrowing, having risen sharply in recent years, will soon spiral to levels not seen since the Second World War. Meanwhile, the pound has lost a third of its value in less than a year – pushing import prices up.

All these developments are inflationary. Fiscal and monetary policy are wildly out of control. Yet inflation, we're told, isn't a problem. Inflation is yesterday's news. Politicians and their pet commentators warn of deflation under every stone. I accept that falling prices warp incentives, increase real debt burdens and – if expected to continue – stymie retail spending. That's what plunged Japan into a decade-long recession in the 1990s.

But UK deflation simply doesn't exist. In December, annual CPI inflation fell to 3.1 per cent – way above the Bank's 2 per cent target. That number was used as "evidence" we're on "the brink of deflation". Anyone examining this data could see the lower inflation rate was driven by the one-off 2.5 point VAT cut. Adjusted for tax, the CPI actually rose – from 3.9 to 4.1 per cent. That's not surprising given that our ailing currency saw import prices rise a painful 14 per cent. CPI inflation fell to 3 per cent in January. Again, the detailed data is instructive. Food price inflation hit 10.3 per cent. Even "core inflation" – excluding food and fuel – rose, despite the screams of "deflation" from Whitehall and beyond.

Why are our so-called leaders creating deflationary fears? As an excuse for grabbing monetary policy back off the Bank of England and nailing interest rates to the floor, while junking fiscal caution and borrowing in a fashion akin to that of a banana republic. Our historically ignorant politicians – and their pliable, time-serving technicians – have responded to the credit crunch by avoiding the real issues. Using "deflation" as an alibi, they've taken the line of least resistance. Now, in a final desperate throw of the dice, we're seeing "quantitative easing" – in other words, "printing money". How will this ridiculous policy help? Have we learnt nothing from Zimbabwe, Argentina or the Weimar Republic? The huge inflationary dangers of "QE" are obvious – in particular alongside massive government borrowing, a tumbling currency and repeated interest rate cuts.

The UK's policy will make historians wince. But being seen to be "doing something" is easier than doing what really needs to be done. For that would involve politicians tackling powerful vested interests and admitting to previous regulatory mistakes. Ministers, first and foremost, need to hose down a banking sector that's holding the country to ransom. Our most senior bankers should be gathered in a locked room and – under threat of custodial sentence – be forced to disclose the full extent of their potential sub-prime losses. At the moment, banks are lying about the liabilities they face. That's why they won't lend to each other – which has gridlocked the inter-bank market, blocking crucial credit lines to firms and households.

Banks rendered insolvent must be merged and/or nationalised – with the bad loans "fessed up" and written off before more taxpayer money is spent on recapitalisation. Gordon Brown has taken a "head-in-the-sand" Japanese approach – creating the UK's "zombie banks" which are technically alive (allowing powerful executives to keep their jobs and save face) but commercially dead, and a drain on society given the extent of their toxic debts. We instead need the kind of hard-headed banking purge the Swedes used to escape financial crisis in the early 1990s. Until that happens, and the inter-bank market re-boots, the UK will continue to haemorrhage jobs.

Beyond this, Brown's regulatory regime must be scrapped, returning responsibility for bank supervision to the Bank of England, where it belongs. The split between the Old Lady and the Financial Services Authority is inefficient and dangerous – as we've seen. In addition, the Bank needs greater power to impose counter-cyclical reserve requirements – so banks create less credit when the economy is booming, but more in a downswing. That would take the pressure off interest rates as a tool of demand management – a blunt, discredited instrument.

Above all, we need desperately to reimpose the split between commercial banks (which take in deposits, then lend to ordinary businesses) and investment banks (which use higher risk strategies).

The removal of this "Glass-Steagall" firewall in the UK and the US is the prime reason for the crisis. By merging with commercial banks, leveraging their taxpayer-backed deposits and using them to place reckless bets, the investment banks have destroyed the financial strength of the Western world. Yet still, our politicians hesitate. Bewitched by the power of the money men, they fail to do what must be done.

If he had any self-awareness, Gordon Brown would hang his head in shame. His big spending, and debt accumulation, contributed mightily to our grave situation. But the Tories need to examine their conscience, too. For years, they backed Labour's irresponsible spending plans. Since the crisis began, their ideas on banking and regulatory reform have been vague and incoherent. The UK faces a wave of inflation, a potential gilts strike and the danger of another IMF bail-out. What is HM Opposition doing to stop this policy vandalism? Has David Cameron got the courage to risk ridicule by pointing to the madness of the policy consensus?

Liam Halligan is Chief Economist at Prosperity Capital Management

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What would Gordon Mugabe say?

Denial, of course.

He'll just surround himself with sycophants, who agree with his every word, and fire any dissenters until he ends up as delusional as Mugabe.

Meanwhile they'll bang on and on and on about the dangers of deflation while as surreptitiously as possible (including changing laws and manipulating statistics and withholding information) inflating like crazy - sorry, quanitatively easing like crazy.

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Denial, of course.

He'll just surround himself with sycophants, who agree with his every word, and fire any dissenters until he ends up as delusional as Mugabe.

Meanwhile they'll bang on and on and on about the dangers of deflation while as surreptitiously as possible (including changing laws and manipulating statistics and withholding information) inflating like crazy - sorry, quanitatively easing like crazy.

I am pleased you qualified your closing statement to make it more palatable to the populus.

Maybe when the first round of QE doesn't work, we will have QEII :lol::lol::lol:

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Highbrow economic theory goes right over my head, but I heard the programme he refers to last week on Radio 4 and this bloke came out of it as the only one talking sense.

This article confirms that impression.

The problem is debt. Inflation erodes debt. So inflation it is, then.

Now remind me; just what is it about inflation that has made us so scared of it for the last 30 years?

;)

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Of course, we've had high inflation for the last ten years or so, because of the fact of rising house prices. Just that was conveniently hidden from the official figures.

i.e. the common man's wage has effectively been deflated away. The reason people didn't notice was because of MEW.

Wages need to catch up, and by a long way. That means pay rises, and lower prices. Summer of discontent, anyone?

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Highbrow economic theory goes right over my head, but I heard the programme he refers to last week on Radio 4 and this bloke came out of it as the only one talking sense.

This article confirms that impression.

The problem is debt. Inflation erodes debt. So inflation it is, then.

Now remind me; just what is it about inflation that has made us so scared of it for the last 30 years?

;)

Keep letting all this high brow sh1t go over your head, it is often meant to confuse and confound, just follow your instinct.

Yabba dabba doo

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If there is Quantitative Easing, is there also Qualitative Easing and should we give that a go? :huh:

I think we've already been there, qualitative easing, that is. It didn't work. So now we're getting quantitative easing as well.

From Wikipedia:

Quantitative easing

Willem Buiter has proposed a terminology to distinguish quantitative easing, or an expansion of a central bank's balance sheet, from what he terms qualitative easing, or the process of a central bank adding riskier assets onto its balance sheet:

"Quantitative easing is an increase in the size of the balance sheet of the central bank through an increase it is monetary liabilities (base money), holding constant the composition of its assets. Asset composition can be defined as the proportional shares of the different financial instruments held by the central bank in the total value of its assets. An almost equivalent definition would be that quantitative easing is an increase in the size of the balance sheet of the central bank through an increase in its monetary liabilities that holds constant the (average) liquidity and riskiness of its asset portfolio."

"Qualitative easing is a shift in the composition of the assets of the central bank towards less liquid and riskier assets, holding constant the size of the balance sheet (and the official policy rate and the rest of the list of usual suspects). The less liquid and more risky assets can be private securities as well as sovereign or sovereign-guaranteed instruments. All forms of risk, including credit risk (default risk) are included."

Edited for clarity.

Edited by Methinkshe
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There are some deflationary pressures - falling oil prices, lower wages. However the longer term risk is inflation IMO. Money printing is going to end up being the only way to service the UK's ever growing debt black hole. The world does not owe us a living and we are not a reserve currency. This means we are uniquely placed to be in the most debt and the least likely to fund it.

Most worrying is that we have all the tools in place to prevent wage inflation - high immigration, anti union laws etc. Inflation without wage inflation will be a disaster for most in this country. The idle rich vested interests of UK PLC will see us return to Victorian squalor before they release their grip on both political parties.

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Guest Daddy Bear
There are some deflationary pressures - falling oil prices, lower wages. However the longer term risk is inflation IMO. Money printing is going to end up being the only way to service the UK's ever growing debt black hole. The world does not owe us a living and we are not a reserve currency. This means we are uniquely placed to be in the most debt and the least likely to fund it.

Most worrying is that we have all the tools in place to prevent wage inflation - high immigration, anti union laws etc. Inflation without wage inflation will be a disaster for most in this country. The idle rich vested interests of UK PLC will see us return to Victorian squalor before they release their grip on both political parties.

It will be so

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Gordon Brown has taken a "head-in-the-sand" Japanese approach – creating the UK's "zombie banks" which are technically alive (allowing powerful executives to keep their jobs and save face) but commercially dead, and a drain on society given the extent of their toxic debts.

It's like Dawn of the Dead, zombie institutions created by a zombie leader, the evidence is Gordon Brown is one of the undead is plain to see:

The complexion of a corpse

Mumbles incoherently

A jaw that falls open at the end of a sentence

Has ambitions to take over the world

Brain dead

Unable to interact with human life

A rotting smell

Edited by Sinking Feeling
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Agree with all his proposed solutions.

This is what the Tories should be screaming from the rooftops. It requires Brown to be kicked out first.

It may require Brown to be kicked out before sensible policies are implemented but the Tories could be making a better job of selling to the electorate some better policies - that is, if they agree with those suggested by LH, and I'm none to sure whether they do - in fact, I'm not at all sure what their policies are.

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Agree with all his proposed solutions.

This is what the Tories should be screaming from the rooftops. It requires Brown to be kicked out first.

The Lib Dems have been trying to shout for a good few years about this whole financial mess.............trouble is no-one wanted to listen. You're right, the Conservatives don't have a grip on this either. The only politition I am beginning to think who 'gets it' has been Vince Cable who's been warning of problems since 2003.

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Does not mention the fact that RPI was 0.1% last month and likely to go negative soon. I can understand why no-one takes him seriously.

What is CPI at the moment, I bet it isn't 0.1%.

I said a while ago on here that the government would switch to whichever inflation figure suits them at the time, if that doesn't work they will change the calculation.

I wouldn't believe any statistic over a period of time when the method of calculation is mutable.

Edited by Ulfar
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The following comment sums the article up quite well-

The nice man at the BMW dealers told me now is a great time to buy a new BMW.

The nice man at O2 told me now is a great time to buy a brand new top of the range mobile.

The nice lady at the travel agents told me now is a great time to book an expensive holiday.

Michael, Leighton Buzzard, La la land

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Agree with all his proposed solutions.

This is what the Tories should be screaming from the rooftops. It requires Brown to be kicked out first.

They're not screaming this from the rooftops because banking regulation isn't the sort of thing that's going to whip up the voting public into a state of frenzied excitement.

It would be the dullest election victory in the whole of western democracy's history.

The Tories are finding themselves in ideological bother because ostensibly they stand for the same things as Labour and to make a substancial deviation from this path would require them to make some tough decisions. They're simply not up to the job.

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