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Dose Of Inflation Can Be Good Medicine

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http://www.thisislondon.co.uk/standard-business/article-23915012-dose-of-inflation-can-be-good-medicine.do

Anthony Hilton

18 Jan 2011

Today's inflation figures are really good news, because what this country badly needs is a steady dose of low-level inflation.

As long as it remains modest — say below 5% — inflation should prove to be a positive aid to our economic recovery and give us an edge over countries where inflation is lower — which include the eurozone, Japan and the US.

Far from wringing our hands over today's inflation numbers, which once again showed prices to be well above the official target, we should raise a glass in quiet celebration and drink a toast to Bank of England Governor Mervyn King and his colleagues on the monetary policy committee.

What would be absolutely disastrous would be for King and the other rate-setters to give in to the pressure from many who should know better, including the Prime Minister, and lift interest rates to try to stop the current round of price rises. Such an act would be more likely to stifle the economy.

If inflation is caused by a buoyant economy overheating — conditions where raw-material prices get bid up and labour becomes scarce and more expensive — it can make sense to increase interest rates to dampen down economic activity so things cool off.

But that is not why we have inflation now. When rising prices are caused by a VAT increases, or a rise in the world price of oil, or global crop failures, the raising of UK interest rates will have no effect on the underlying situation.

We could raise rates to 10% but it would not increase the supply or the world price of meat, wheat, iron ore or petrol.

But what it would do — what even a small increase in rates would do — is make life harder for the economy as a whole, leading to more mortgage foreclosures, more bankruptcy and less investment. Such a policy could knock the economy back on its heels.

What everyone needs to grasp is that when debt is the problem, inflation can be the least painful solution, and when crunching economic readjustment is necessary, inflation can oil the moving parts to make the transition smoother and less painful.

Economists have known this for years — at least since Keynes in the 1930s — but, like so much else, it has been forgotten in recent times.

Indeed, one reason this global debt problem is proving harder to resolve than the others which have happened down the centuries is that this time inflation in most parts of the word is so low.

Indeed, it is the absence of inflation in Japan for almost 20 years that has saddled the country with a debt burden of almost 200% of GDP, and no chance of lightening it.

There are only three ways to escape being crushed by debt once it gets to a certain point — default, deflation and debasing the currency.

Default is always a possibility but perhaps not the most honourable course, though it has proved popular down the ages.

Economist Roger Bootle is fond of saying the Greeks first defaulted well before the birth of Christ.

Bringing things up to date, several towns and states in America may well default on some of their bond issues before the year is out.

Deflation involves massive belt-tightening, and means channelling money into debt repayment at the expense of everything else so that the debt burden is eased — which is a bit like what they are trying to do in Ireland.

It backfires when the squeeze is too great for the country to bear, and sinks overall economic activity faster than the debt gets paid off. Then social unrest erupts.

Germany after the First World War, when it had to pay reparations to the victorious allies, is the extreme case, but the point about all austerity programmes — including that of the coalition Government — is that the pain is never evenly spread, and it can impose huge social costs.

Inflation on the other hand makes these adjustments more gentle and more even.

Tax revenues rise as people move into higher income bands, business can scale back wage costs by pegging pay increases to less than the inflation level, and these measure reduce demand without the additional pain of unemployment.

And all the time the real value of the debt burden is eroded.

Not without reason did Einstein describe compound interest as the most powerful force in the universe.

Inflation running at 4% reduces the overall debt burden by almost 25% in five years and virtually halves it in nine years.

Who needs George Osborne? Leave the MPC alone, and it will solve the problem.

Obviously it is not a free lunch. Inflation rewards the feckless and indebted but punishes prudent savers and those on fixed income.

It can also get out of hand and rise to a point where its evils more than cancel out its beneficial effects. But not provided it is held at modest levels.

As the economists Franco Modigliani and Robert Solow suggested 30 years ago, society as a whole probably functions better and is happier with 5% inflation and 5% unemployment than with 1% inflation and 9% unemployment.

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Quick, tell the sheeple inflation is good. Look into our eyes, inflation is good. Don't look around the room, inflation is good, HPI is good.....inflation is good, rising prices are good. 5% inflation is steady. INflation and HPi are both good.

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Obviously trained at the Mugabe school of economics, what a load of gibberish.

Must have a big mortgage, but hasn't worked out yet that if his wages don;t keep up with spending he won;t be affording his no matter what the central nuthouse set the increasingly meaningless base rate at. Newspapers are largely a discretionary purchase, as sales slide fewer papers will be sold - wonder if he's been able to make that llink and possible jobs loss.

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Newspapers are largely a discretionary purchase, as sales slide fewer papers will be sold - wonder if he's been able to make that llink and possible jobs loss.

Evening Standard is free.

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People are happy to have to pay more and more for their accommodation, it's only logical that they extend this to thinking that higher cost of food and other living costs are a good thing.

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If the alternative is paying back capital sqandered over the last 20 years, maybe they have a point. Current income isn't enough to pay back that state debt, they have to pinch some of loot stashed away in that time.

I'd rather we had a better balance of taxation though (income vs accumulated wealth)

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The broad money measure is falling. Even with Sterling depreciation, if you take out tax rises, CPI is 1.9%. This is not "proper" inflation a la 70s and 80s - this is people getting poorer and the government increasing the tax take.

Exactly. It is a falling standard of living.

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Inflation is only good for those with a good job with future prospects and high debt......anyone with a low or fixed income or savings made over time to help buffer their future is well and truly up the swanny. ;)

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Was going to start a new thread, but can't so I'll post this here.

Jeremy Vine show on R2 now talking about pros and cons of inflation.

Very good woman "expert" was explaining why lower house prices are a good thing.

Should be on listen again later if you miss it.

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Today's inflation figures are really good news, because what this country badly needs is a steady dose of low-level inflation.

So annual inflation well over the 2% target every year year in year out isn't a steady dose of inflation already and isn't enough for him.

Where's he been all his life.

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As a long term reader of HPC I do remember many stating that there was a risk the government would covertly "solve" the house price problem through inflation. Inflate those debts away! This isn't my take - I'm just recalling this was often raised as a possability, an HPC prediction coming true if you like.

My grand parents bought their house for 5k! If they still had a mortgage on it I'd pay it off myself!

I think saying "inflation is bad" is too simplistic. Deflation or stagnation aint a bed of roses either. So clearly there is a balance- and we are a little way from hyper inflation just yet. Come on peeps we don't like bias of any kind here at HPC and that includes sensationalism. But I can see why the idea has non-home owners concerned. Whilst we are all screwed in that scenario, at least a home owner is screwed and has a roof over their head!

Edited by Orbital

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Obviously it is not a free lunch. Inflation rewards the feckless and indebted but punishes prudent savers and those on fixed income.

Even that sop statement to the "prudent savers and those on fixed income" is misleading as it's trying to imply that there's no alternative when there's inflation.

There's been plenty of times when for example savings rates have either matched or even exceeded inflation rather than being savagely thieved by dishonest, criminal and fraudulent economic policies.

Edited by billybong

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The broad money measure is falling. Even with Sterling depreciation, if you take out tax rises, CPI is 1.9%. This is not "proper" inflation a la 70s and 80s - this is people getting poorer and the government increasing the tax take.

One person at least here starts to understand.............

Cost Base Rises do not in themselves cause or more critically, create, "Inflation": yes, over time, they can have an effect on value of money unit. However, because of what are called Fiscal Drag and Velocity of Circulation (Of cash) such effects are not instant.

Which is why Mad Merve's fond hope that the recent VAT rise will "Dampen down demand and thus relieve inflationary pressures" is so much ******.

If Cost Rises did directly cause inflation, per se, then it follows that during the period when crude oil was ramped by speculators some time back, inflation should have been roaring away already: clearly it wasn't.

Additionally, and more critically, Britain imports amount to circa £32 Billion Deficit.

And the size of trade and deficit with the EU has massively increased since 2002.

Since UK Exports of goods and services to the EU comprise circa 30% of GDP, yet as the Balance is in deficit, then logically, it must follow that British imports from the EU equate to probably 40% of value of GDP.

Yet since 2002, Sterling Depreciated against the Euro from around 1.55 € to £1 to as low as € 1.05.

Thus by now, if cost base increase causes inflation, then by now, inflation ought properly to be roaring along at over 10%!

Clearly it isn't.

Germany after the First World War, when it had to pay reparations to the victorious allies, is the extreme case,

I just loved this comment by the idiot Hilton!

What actually happened with the Weimar Republic was a spavined government tried to pay off their war reparations by printing money.

Sound familiar?

What will shortly cause inflation is the UK government and the B of E's actions in fiscal stimuli and QE.

Since real core inflation is caused by money supply (Real issued actual money: not what is called "Credit Money" since this is transitory and doesn't actually exist) being expanded out of logical and sympathetic step with GDP.

As a fiat currency state relies essentially on the absolute underlying value of its economic activity to back issued currency.

Once systemic real inflation takes hold, then the purchasing value of money falls: and this causes workers to demand wage/salary rises: and manufacturers and suppliers demand higher prices to stand still: and imports of essential materials and commodities rapidly increase as the unit value in exchange for other hard currencies drop.

And then one suffers Hyper-Inflation.

Clearly, Mad Merve and the Government do not either understand the causes of inflation: or lie through their back teeth.

The media (As always) simply repeat the script and the myths and lies since they are too dumb to question the nonsense.

Tax Increases, BTW, can in point of fact, help to deflate an economy: since the revenues can be held outside circulation: but if the proceeds are spent, then they simply recycle through government spending.

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A measure of what the coalition expect inflation to be is the student funding changes beginning in 2012. It implies that in 5 years' time it will be perfectly sustainable for an average 22 year old to have £50-£60k in unsecured debt. This tells us all we need to know about the scale of inflation expected in the next 5 years.

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A measure of what the coalition expect inflation to be is the student funding changes beginning in 2012. It implies that in 5 years' time it will be perfectly sustainable for an average 22 year old to have £50-£60k in unsecured debt. This tells us all we need to know about the scale of inflation expected in the next 5 years.

...born with debt, die with debt......live your life swimming in debt...and the little one said roll over roll over. ;)

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inflation won't fix anything without pay rises, in fact it will make things a lot harder.

if wages rise then the jobs won't last long. :unsure:

inflation is here to stay, low wage rises are here to stay, lower houses prices are on their way. ;)

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Bank of England Inflation Propaganda Reports 2010

High UK Inflation that has apparently surprised everyone to the upside for virtually the whole of 2010, by spiking and remaining above 3% from early in the year illustrates the tendency of the mainstream press to basically regurgitate the views of vested interests that beat the drum of always imminent DEFLATION for the whole of the year as High inflation was always just temporary and should be ignored by the general population.

To look at the reason why high inflation has been ignored during 2010 we have to look beyond journalists, we have to look beyond academic economists that are paid to follow a school of thought that their pay masters want to push in the media. The place to look for the reason why high Inflation was ignored throughout 2010 is to the very top of the financial pyramid, to the Bank of England.

The connection that the mainstream press has never been able to make is that the Bank of England does NOT make Forecasts. Instead the Bank of England quarterly inflation forecast reports are nothing more than ECONOMIC PROPGANDA, that virtually always converge towards the Bank of England achieving its 2% Inflation target in 2 years time, despite the fact that historical analysis shows that the Bank of England FAILS in achieving its 2% target 96% of the time.

The following are the four quarterly Inflation forecast reports by the Bank of England issued during 2010 that were instrumental in academic economists and journalists in the mainstream press regurgitating the always temporarily high inflation mantra during 2010.

The Bank of England's most recent Inflation Report (November 2010) now forecasts UK CPI Inflation to target an early 2011 peak of 3.5% before inflation falls to below 2% CPI by the end of 2011 to target a rate of approx 1.7%, and for inflation to remain well below 2% into the end of 2012, therefore supporting the Bank of England's persistent view that everyone should focus on the Deflation threat and ignore high inflation during early 2011 so as the Bank of England can continue to keep interest rates well below the real rate of inflation for the purpose of funneling savers and tax payers cash onto the balance sheet of the bailed out banks.

The 2010 Bank of England Inflation reports clearly illustrate the persistent trend as was the case for virtually every preceding year in that the Bank of England ALWAYS FORECASTS SUB 2% INFLATION in 2 YEARS TIME.

The Bank of England wastes millions of pounds each year on producing worthless forecasts, the Coalition Government should save this money by instructing the Bank of England to scrap its economic forecasting units.

Clearly the Bank of England relies on the gold fish memory of the mainstream press as the BoE seeks to revise inflation forecasts every quarter to always push forward sub 2% to two years forward, which is nearly always preceded by a trend to below 2% one year forward. In reality the quarterly inflation reports are just propaganda aimed at psychologically managing the populations expectations on the economy and inflation in the direction of where the BoE wants it to be, as the alternative would be to make the BoE's job harder.

For instance if the Bank of England had stated that UK Inflation would be above its 3% target throughout 2010 then that would have ignited a wage price spiral that would have made the Bank of England's job at controlling inflation significantly harder, therefore it is much more convenient for the Bank of England to be seen to be wrong in its inflation forecasts than to attempt to accurately publicise probable inflation expectations. For instance if the Bank of England was not expecting high inflation during 2010 and beyond then why did the Bank of England's own staff pension fund switch from being 30% invested in inflation index linked government bonds to 70% during late 2009 ?

More here - The Real Reason for Bank of England's Worthless CPI Inflation Forecasts

As expected, the Governor of the Bank of England continues with the mantra of ALWAYS temporarily high inflation even as the UK stands at cusp of a further spike higher in UK's Inflation Mega-trend towards breaking above CPI 4%. The facts are that the evidence clearly shows that the Bank of England HAS LOST CONTROL of INFLATION! (Perhaps it was never in control of inflation in the first place, just lucky to have benign economic conditions during the early Labour years).

Nothing illustrates the deflation delusion more than the following UK CPI Inflation index graph, which shows that the much hyped of Deflation during the Great Recession of 2008-2009 that academic economists still cling to has turned out to be nothing more than a mere inconsequential blip along the path of the Inflation Mega-trend.

http://www.marketoracle.co.uk/Article25637.html

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  • 284 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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