If Inflation Starts Going In The Uk

[aa3]

As many of you know I am a very strong proponent of massive QE.. as I view most of the world moving deeper and deeper by the month into a deflationary death spiral. Because of the nature of the fractional reserve monetary system.

But I fully admit if inflation does start going Britain is toast. That is how close we are to state failure ala eastern Europe. Say inflation starts moving at 4% or higher, the state would still be in a position where it had to run deficits of ~£200 billion pounds. When you have revenues of about £500 billion and expenses of ~£700 billion there is no easy way to close that deficit gap.

In fact I've mentioned before that to close the gap would require reducing people on the government payroll by 25%. And there is 8.8 million directly employed by the state with millions more as contractors. So we are talking about at least 2.2 million layoffs. In boom times this might be conceivable as many could find employment in the private sector, but right now the private sector itself is in severe contraction. So firing 2.2 million would almost certainly lead to massive defaults on mortgages, car loans, credit cards etc.

Even the IMF solution is questionable to me. Its one thing to provide a few billion to Pakistan to buy time. But the UK would need hundreds of billions of dollars, with the current IMF fund only at something like $200 billion. And its not like countries like Indonesia and Mexico had total public and private debts nearing 400% of GDP. If the IMF stepped in and ordered a massive reduction in the state, it would almost certainly cause a death spiral of loan defaults and bank failures.

One possibility I see is QE to inflate away the real value of the private debts outstanding, and crash the pound year by year.. then go to the IMF at that point.

[spivT]

ummm, let's see.....

run deficits at 15%+ or lay off 2.2 million people. tricky one.

here's another idea, you keep running deficits and you find another way of maintaining control over interest rates besides issuing copious amounts of govt. debt [aka corporate welfare coupons].

oh, and stuff the imf.

that way you don't need to inflate away debt. you'd save enough jobs to allow enough people to pay down their debts. that's still possible even under FIAT - plus this saving and debt paying nonsense it seems to have made a bit of a comeback under your 'deflationary death spiral' .

this idea that the non-govt debt needs to keep expanding at such a pace in order to address nonsensical deficit concerns plus the idea that you then have to inflate away such increasing debts, it all sounds a bit jackanory.

[Housing Bear]

Yes, I dont see any alternative! How are they going to pay off the debts in a depression! Tax receipts are falling, government expenditure is rising. There is only one time honoured rout left. It is now called QE, but used to be called PRINTING MONEY! The UK could easily be another Iceland.

[Jesusaves]

As many of you know I am a very strong proponent of massive QE.. as I view most of the world moving deeper and deeper by the month into a deflationary death spiral. Because of the nature of the fractional reserve monetary system.

But I fully admit if inflation does start going Britain is toast. That is how close we are to state failure ala eastern Europe. Say inflation starts moving at 4% or higher, the state would still be in a position where it had to run deficits of ~£200 billion pounds. When you have revenues of about £500 billion and expenses of ~£700 billion there is no easy way to close that deficit gap.

In fact I've mentioned before that to close the gap would require reducing people on the government payroll by 25%. And there is 8.8 million directly employed by the state with millions more as contractors. So we are talking about at least 2.2 million layoffs. In boom times this might be conceivable as many could find employment in the private sector, but right now the private sector itself is in severe contraction. So firing 2.2 million would almost certainly lead to massive defaults on mortgages, car loans, credit cards etc.

Even the IMF solution is questionable to me. Its one thing to provide a few billion to Pakistan to buy time. But the UK would need hundreds of billions of dollars, with the current IMF fund only at something like $200 billion. And its not like countries like Indonesia and Mexico had total public and private debts nearing 400% of GDP. If the IMF stepped in and ordered a massive reduction in the state, it would almost certainly cause a death spiral of loan defaults and bank failures.

One possibility I see is QE to inflate away the real value of the private debts outstanding, and crash the pound year by year.. then go to the IMF at that point.

Alternatively, you could allow the Public Sector numbers to wane naturally through retirement and job changes, increase both direct and indirect taxation and keep pushing up the retirement age.

What's the problem with a 'long-term' fix?

[BalancedBear]

QE will lead to inflation, but debt is not inflated away, unless incomes rise in line with inflation. If wages are static, but we get inflation it will be much worse than debt deflation, as living costs will rise leaving even less to pay for debt servicing, which will in turn lead to even more debt default. Devaluing a currency is a dangerous game and normally ends in disaster unless it is nipped in the bud.

[spivT]

Yes, I dont see any alternative! How are they going to pay off the debts in a depression! Tax receipts are falling, government expenditure is rising. There is only one time honoured rout left. It is now called QE, but used to be called PRINTING MONEY! The UK could easily be another Iceland.

if you mean govt. debt, it's issued voluntarily.

running deficits used to be quite normal, even under a gold standard. It should be even more achievable under fiat. But there's a gold standard mentality of thinking about govt. deficits which is nonsense.

QE absolutely isn't the only route. read my previous post.

[spivT]

Alternatively, you could allow the Public Sector numbers to wane naturally through retirement and job changes, increase both direct and indirect taxation and keep pushing up the retirement age.

What's the problem with a 'long-term' fix?

that's what they ARE doing.

[HumanAction]

QE will lead to inflation, but debt is not inflated away, unless incomes rise in line with inflation. If wages are static, but we get inflation it will be much worse than debt deflation, as living costs will rise leaving even less to pay for debt servicing, which will in turn lead to even more debt default. Devaluing a currency is a dangerous game and normally ends in disaster unless it is nipped in the bud.

If we get inflation we will also eventually get wage inflation too, wages will lag prices but ultimately debt would get inflated away in such a scenario. I think those looking to prop the current system up do not have the choice anyway, deflation is an unthinkable outcome for both govt and the banks. It just wont be allowed to happen given that they do ultimately have the power to expand the money supply to avoid it. Whether they can avoid defaltion without provoking a crisis in confidence in the currency is another matter, personally I think we are headed for very high inflation and potential monetary collapse.

[interestrateripoff]

Alternatively, you could allow the Public Sector numbers to wane naturally through retirement and job changes, increase both direct and indirect taxation and keep pushing up the retirement age.

What's the problem with a 'long-term' fix?

Pensions?

[RB's love cub]

If we get inflation we will also eventually get wage inflation too,

Not for sure, we could just hve falling standards of living, I love the assumtion though

I'm afraid we are a poor little country thats been living it up and soon will have to pay ala Argentina,

people are going to be mighty angry very soon, much disquiet

[HumanAction]

If we get inflation we will also eventually get wage inflation too,

Not for sure, we could just hve falling standards of living, I love the assumtion though

I'm afraid we are a poor little country thats been living it up and soon will have to pay ala Argentina,

people are going to be mighty angry very soon, much disquiet

Actually I assume falling standards of living because what wage rises come will lag prices. If you check you'll see I said as much.

[mdman]

The deflationary death spiral is the bogeyman used by you QE lunatics to justify transfer of wealth from pensioners and savers to debtors and bankers.

The US had a depression in 1920 - the government did not intervene, there was a wave of bankruptcies and the productive economy recovered rapidly

The US had a depression in the 1930s - the government intervened massively, it did not stop the wave of bankruptcies , all it did was prolong the decline

Japan had a credit bust from the 80s onwards - they intervened massively with QE, ZIRP, fiscal stimulus and public works and they are in a multi-decade decline

The evidence objectively supports the Austrian school, but you QE mad hatters look at the evidence, and simply conclude, they didn't try hard enough. You are insane (by Einstein's definition)

[stuckmojo]

This is not about IF we get inflation, but WHEN.

Let me be more precise; it will be stagflation, with wage increases lagging and standards of living falling even lower than they are now.

[fallingbuzzard]

Living standards will undoubtedly fall in the UK, US and even Europe whilst they rise in the developing world. We have to do something to improve living standards, its not a birthright. And if inflation starts going, the obvious solutions will be followed, not the outlier, so interest rates and taxes will rise. I am of the view that the man on the street has got that by now.

[aa3]

Right now people who inherited large amounts of money have been getting an easy ride. They've been making like 4% on their money while not taking any risk whatsoever. The idle rich. But someone is having to pay for that extravagance.

Now policy may be moving the other way, where the real value of their money will decline unless they spend it now. Although so far even with all this printing and ZIRP there stil has been a slight deflation.

In an era where there is way too much savings like everyone saving for a retirement of luxury.. and not enough opportunity. NIRP becomes the logical outcome. NIRP meaning to me holding government bond rates under 1%, while causing an inflation of say 5-10% a year.

[spivT]

Right now people who inherited large amounts of money have been getting an easy ride. They've been making like 4% on their money while not taking any risk whatsoever. The idle rich. But someone is having to pay for that extravagance.

Now policy may be moving the other way, where the real value of their money will decline unless they spend it now. Although so far even with all this printing and ZIRP there stil has been a slight deflation.

In an era where there is way too much savings like everyone saving for a retirement of luxury.. and not enough opportunity. NIRP becomes the logical outcome. NIRP meaning to me holding government bond rates under 1%, while causing an inflation of say 5-10% a year.

where's this inflation coming from ?

which era of savings are you referring to, the era which has only just started.

if, as you suggest, there is a glut of savings, then what do you think the govt. deficit represents ?

answers on a postcard.

[scepticus]

The evidence objectively supports the Austrian school, but you QE mad hatters look at the evidence, and simply conclude, they didn't try hard enough. You are insane (by Einstein's definition)

Nope. (Firstly let me say I don't agree with aac that QE led negative real rates are not the way to go. Just doing more QE won't generate the kind of inflation and currency deval needed).

There was significant monetisation during the GD characterisaed as a 'revaluation'. This generated a recovery that was killed off by conservative policies at the fed, and which led in short order to WWII.

Here is some background about whether the miserly monetary regime advocated by the austrian school or a more expansionary policy works best:

"Economic studies have indicated that just as the downturn was spread worldwide by the rigidities of the Gold Standard, it was suspending gold convertibility (or devaluing the currency in gold terms) that did most to make recovery possible.[43] What policies countries followed after casting off the gold standard, and what results followed varied widely.

Every major currency left the gold standard during the Great Depression. Great Britain was the first to do so. Facing speculative attacks on the pound and depleting gold reserves, in September 1931 the Bank of England ceased exchanging pound notes for gold and the pound was floated on foreign exchange markets.

Great Britain, Japan, and the Scandinavian countries left the gold standard in 1931. Other countries, such as Italy and the United States, remained on the gold standard into 1932 or 1933, while a few countries in the so-called "gold bloc", led by France and including Poland, Belgium and Switzerland, stayed on the standard until 1935-1936.

According to later analysis, the earliness with which a country left the gold standard reliably predicted its economic recovery. For example, Great Britain and Scandinavia, which left the gold standard in 1931, recovered much earlier than France and Belgium, which remained on gold much longer. Countries such as China, which had a silver standard, almost avoided the depression entirely. The connection between leaving the gold standard as a strong predictor of that country's severity of its depression and the length of time of its recovery has been shown to be consistent for dozens of countries, including developing countries. This partly explains why the experience and length of the depression differed between national economies."

[tennaval]

Its entirely rational to assume that wage inflation will eventually follow market place inflation. However in this new paradigm I'm not sure this will be quite the given its been in the past. I live between Uk and Italy. Wage growth in Italy has been depressed and static for several years, 1000 euro a month is a very standard professional salary. They only cope by living together as extended families.

I am an STR from 07, I havent lost the faith yet, this is a slow burn, when austerity measures kick in, taxes up, interests rates up, public sector strikes etc, a major tipping point will occur thats hitherto remained remarkably elusive, sentiment will then change and when it does a tsunami of reality will wash out any remaining vestiges of fantasy and optimism in its path. For me the future looks bleak, an even more divided society and a much lower standard of living.

[fallingbuzzard]

These way too much savings must be under the mattress because they are not in banks or building socities!

In an era where there is way too much savings like everyone saving for a retirement of luxury.. and not enough opportunity. NIRP becomes the logical outcome. NIRP meaning to me holding government bond rates under 1%, while causing an inflation of say 5-10% a year.

[stuckmojo]

Its entirely rational to assume that wage inflation will eventually follow market place inflation. However in this new paradigm I'm not sure this will be quite the given its been in the past. I live between Uk and Italy. Wage growth in Italy has been depressed and static for several years, 1000 euro a month is a very standard professional salary. They only cope by living together as extended families.

I am an STR from 07, I havent lost the faith yet, this is a slow burn, when austerity measures kick in, taxes up, interests rates up, public sector strikes etc, a major tipping point will occur thats hitherto remained remarkably elusive, sentiment will then change and when it does a tsunami of reality will wash out any remaining vestiges of fantasy and optimism in its path. For me the future looks bleak, an even more divided society and a much lower standard of living.

This is consistent to what I see in the North of Italy, where I am originally from. Even in the Milan-Alps region, which is supposed to be one of the richest areas in the world, graduates (with real degrees eg Engineering etc) beg for 1000€ per month and a permanent job.

Something's got to give. It will be the living standards. And for those who think that those with the money will hoover up all the properties, the UK is not Italy. Most people have no savings.

[getdoon_weebobby]

In an era where there is way too much savings like everyone saving for a retirement of luxury.. and not enough opportunity. NIRP becomes the logical outcome. NIRP meaning to me holding government bond rates under 1%, while causing an inflation of say 5-10% a year.

Uk = too much savings ?!?!?!?!?!?!?!?!?!?!?!?!?!?!?!?!?!?!?!?!?!?!?!?!?!?!?!

[scepticus]

These way too much savings must be under the mattress because they are not in banks or building socities!

Most of the savings in question are invested in hedge funds, equities, gilts, corporate bonds etc. Only idiots keep large amounts of cash in the bank and think they have made an investment.

Of course the various investments above will continue to show a poor real return while growth is low or non existent.

[Injin]

Nope. (Firstly let me say I don't agree with aac that QE led negative real rates are not the way to go. Just doing more QE won't generate the kind of inflation and currency deval needed).

There was significant monetisation during the GD characterisaed as a 'revaluation'. This generated a recovery that was killed off by conservative policies at the fed, and which led in short order to WWII.

Here is some background about whether the miserly monetary regime advocated by the austrian school or a more expansionary policy works best:

"Economic studies have indicated that just as the downturn was spread worldwide by the rigidities of the Gold Standard, it was suspending gold convertibility (or devaluing the currency in gold terms) that did most to make recovery possible.[43] What policies countries followed after casting off the gold standard, and what results followed varied widely.

Every major currency left the gold standard during the Great Depression. Great Britain was the first to do so. Facing speculative attacks on the pound and depleting gold reserves, in September 1931 the Bank of England ceased exchanging pound notes for gold and the pound was floated on foreign exchange markets.

Great Britain, Japan, and the Scandinavian countries left the gold standard in 1931. Other countries, such as Italy and the United States, remained on the gold standard into 1932 or 1933, while a few countries in the so-called "gold bloc", led by France and including Poland, Belgium and Switzerland, stayed on the standard until 1935-1936.

According to later analysis, the earliness with which a country left the gold standard reliably predicted its economic recovery. For example, Great Britain and Scandinavia, which left the gold standard in 1931, recovered much earlier than France and Belgium, which remained on gold much longer. Countries such as China, which had a silver standard, almost avoided the depression entirely. The connection between leaving the gold standard as a strong predictor of that country's severity of its depression and the length of time of its recovery has been shown to be consistent for dozens of countries, including developing countries. This partly explains why the experience and length of the depression differed between national economies."

That wasn't why there was a depression.

There was a depression because of fractional reserve banking. People had been todl they had x and could therefore make plans y and z.

But actually they'd been lied to and there was only fa resources available so plans y and z were not possible.

This is a fine realisation (if painful) if it's allowed to occur. Actually FDR devalued instead of allowing liquidation - which meant that no one could make any real forward plans but knew their old ones were worthless.

Nothing to do with gold and all to do with the population being lied to by bankers. The sooner the lies are revealed and the faster the crap is out of the system, the faster the recovery. The item used as money is completely irrelevent.

[Injin]

Most of the savings in question are invested in hedge funds, equities, gilts, corporate bonds etc. Only idiots keep large amounts of cash in the bank and think they have made an investment.

Of course the various investments above will continue to show a poor real return while growth is low or non existent.

Most people who have "cash in the bank" think they have cash in the bank. i.e. it's just sat there waiting for them.

It's what the word savings means, you see - to put something to one side and not use it. Nobody uses the word savings as you do bar, a few thief bankers and apologist "economists".

Edited October 28, 2009 by Injin

[spivT]

Most peopel who have "cash in the bank" think they have cash in the bank. i.e. it's just sat there waiting for them.

It's what the word savings means, you see - to put something to one side and not use it. Nobody uses the word savings as you do bar, a few thief bankers and apologist "economists".

spot on.