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Bankrupt Britain heading for high (or hyper) inflation.

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On another thread, a veteran poster suggests that in the event of high unemployment, wage destruction and a velocity shock, higher inflation is not possible, or at least unlikely. The poster also suggests that the public will choose to hoard any helicopter money distributed to them. 

I agree, this is a possible outcome, and it clearly uses post-1989 Japan as a model. However, we are not Japan.

If this conclusion was valid in all circumstances, the Weimar Republic should still be in the grip of a secular stagnation. Argentinians should be struggling under the weight (debt carrying costs) of a currency that grows ever stronger in real terms.

On the contrary, Britain seems set for higher inflation in future, and indeed may be uniquely placed among the OECD countries as a candidate for hyperinflation.

Hyperinflation is usually associated with certain preconditions and a vicious feedback loop characterised - paradoxically - by a shortage of money. This is because once the reflexive loop takes hold, each subsequent round of monetary ease (printing), results in less aggregate purchasing power.

One of the preconditions is usually when a high debt, twin-deficit (Government and Current Account) nation loses the confidence of international creditors. Sterilisation of net currency outflows of the debtor nation cease (bond purchases, domestic asset purchases, FDI). The value of the currency falls precipitously, and capital flight takes hold.

At the same time, an economic shock has usually caused domestic credit creation to collapse (institutional and individual creditworthiness is decimated), and asset prices to fall. Tax revenues plummet, corporate profits fall, financial market liquidity falls and consumer confidence collapses.

At the same time, an insatiable government must defend its own purchasing power (and that of its supplicants) by direct creation of base money, bypassing the system of private sector credit creation. At this point, import costs rise and domestic private sector productivity and confidence falls.

The new base money is spent directly on a dwindling supply of consumer goods, first by public sector employees, subsidised corporations/institutions and welfare recipients. As the money circulates, private citizens begin to notice the erosion of their purchasing power, and move to exchange currency for consumer goods at a faster rate. This creates an aggregate decline in the purchasing power of the currency.

In response, to maintain its own purchasing power (in the case of a government that is unwilling or unable to contract its spending in real terms, it must continue to outbid the private sector for goods and labour), the government must print more money, and the doom loop continues.

This isn't a prediction of hyperinflation in Britain. My base case is higher inflation driven by financial repression through yield-curve management and long bond rate caps. However, to borrow a phrase from Ben Bernanke, I think it's a mistake to assume that "it" can't happen here.

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Obviously a lot in there to consider. My knowledge of Japan is that I had unit trusts that did very well in the late 80`s with a Japan market focus, and just around the time I managed to spend most of that money in the boozer Japan started to go pear shaped, great market timing I thought. For sure I would hoard any helicopter money now, not sure if my post implied that everyone would also do so? I think the first hurdle for me in your position is that the global economy is not the same as during Weimar or the Japanese crisis, it is very different. That sort of thought, for me, is like trying to consider how guitar modes/scales work against various chords, it is a long process, for me, so hopefully this can become an interesting and informative thread over time. Oh, I also had a Japanese girlfriend once, couldn`t get much sense out of her about inflation shocks though......

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  • 417 Brexit, House prices and Summer 2020

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      • down 5% +
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