Gilts 7 Deflation

[wadisgod]

All the money appears to be on inflation! Gold and oil.

What happens if we get deflation. When the U.S goes into recession and the BRIC economies are unable to take up the baton, the price of oil and possibly gold will fall. Gilts will be the place to be.

Discuss.

[InternationalRockSuperstar]

Given the rate at which central banks are 'injecting liquidity' (ie. printing money) I don't see deflation happening any time soon. At the end of the day, they can print all the legal tender they like, but they can't print Gold, oil or food. If we do get any deflation it probably won't be until 2010 ish - and it won't be as severe as the inflation we're just about to have (it won't restore the value of money to what it was before the inlfation began).

I woudn't touch Gilts with a bardgepole. Some lucky 5hits bought 30-year bonds at the tale end of the 70s/early 80s when they were paying more than 25%. Since then there has not been a good time to buy Gov't bonds.

[wadisgod]

Good points,

They can't print oil.

What if the world goes into recession (depression) who wants oil?

who can afford food?

Yes People might buy gold.

With the credit crunch people can not borrow to spend!!!

Edited January 7, 2008 by wadisgod

[wadisgod]

The stock markets have plunged. Gold has fallen and Gilts have gone up.

Are the markets telling us that deflation is coming?

Is the gold price just a speculative bubble?

If I had all or even some of the answers I would be retired somewhere warm by now!

[ursamajor]

All the money appears to be on inflation! Gold and oil.

What happens if we get deflation. When the U.S goes into recession and the BRIC economies are unable to take up the baton, the price of oil and possibly gold will fall. Gilts will be the place to be.

Discuss.

If you buy index-linked gilts you get protection whatever the level of inflation. In fact deflation is best as there is a stop-loss on them - they do not go down in value in any year in which there is deflation. This means, ironically, they outperform most assets during deflation. If you believe deflation is very likely then you can up your returns by mixing in some fixed-interest gilts but they seem poor value at current levels and I would still go mostly i-l flavour.

Of course, even i-l gilts are still a form of debt and a bit of gold is still worth having as insurance against default.

[okaycuckoo]

Given the rate at which central banks are 'injecting liquidity' (ie. printing money) I don't see deflation happening any time soon.

But the central banks aren't printing money - they're injecting liquidity, but it's on a rolling basis that sees as much liquidity drained. In fact that enormous injection by the ECB before Christmas - €500 billion - happened in the same week when the previous series of injections was drained by an even greater figure.

The only pumping of the money supply is through credit privately created by money centre banks - and that's slowing down.

Future projections on inflation? Watch US 10 year treasury yields: going doooown.

[ursamajor]

But the central banks aren't printing money - they're injecting liquidity, but it's on a rolling basis that sees as much liquidity drained. In fact that enormous injection by the ECB before Christmas - €500 billion - happened in the same week when the previous series of injections was drained by an even greater figure.

The only pumping of the money supply is through credit privately created by money centre banks - and that's slowing down.

Future projections on inflation? Watch US 10 year treasury yields: going doooown.

The fiscal stimulus in the US is inflationary - new govmnt debt to be dropped onto the eager masses. But I agree the inflation/deflation battle rages with no clear winner yet.

[Housing Bear]

Most people seems to be assuming an inflationary depression. Inflation is the assumption made by most observers, but not by all, by any means. There are of course a substantial body of commentators who anticipate a DEFLATIONARY depression, which we are already beginning to see, similar to the West in the 1930's, or Japan in the 1990's.

Banks have removed vast amounts of credit in the form of mortgages and bank loans, and this is DEFLATIONARY. The current crisis is clearly spreading into the wider economy, and businesses are now having increasing trouble borrowing money.

One look at the retail sector does not give the impression of inflation! On the contrarary, there are endless sales and price cuts. In the city there are increasing layoffs, probably soon to spread to banking, estate agents, and possibly other businesses.

There is inflation in oil and food, about which nobody is in dispute.

Right now it is a matter of opinion which of the two forces of inflation and deflation will win. My personal belief is that we will expereince a massive deflationary recession leading to worldwide depression, and huge unemployment, similar to the 1930's.

In order for the rising food and oil prices to lead to an inflationary recession, wages would have to rise dramatically for the necessary wall of money to be available.

Contrary to commonly quoted wisdom, governments and banks do not print money, they lend it. But right now the banks are NOT lending money, so where is all this supposed cash coming from? Actually M4 is falling dramatically right now, supporting deflation rarther than inflation.

The Japanese central bank lowered interest rates to 0% and encouraged borrowing from corporations and individuals, but this did not prevent a massive deflation of stocks and real estate. My belief is that we will see deflation in the West, but the jury is out on that, and it is too early to be sure. I am not sure myself, but, to me, it certaily looks more like deflation at the moment.

Any thoughts? Best wishes,

Housing Bear.

[Housing Bear]

If you buy index-linked gilts you get protection whatever the level of inflation. In fact deflation is best as there is a stop-loss on them - they do not go down in value in any year in which there is deflation. This means, ironically, they outperform most assets during deflation. If you believe deflation is very likely then you can up your returns by mixing in some fixed-interest gilts but they seem poor value at current levels and I would still go mostly i-l flavour.

Of course, even i-l gilts are still a form of debt and a bit of gold is still worth having as insurance against default.

This is most interesting! I had assumed that if RPI became negative, as you might expect in a bad delfation, that Index Linked Goverment Bonds would reflect this. Am I wrong? I hope so!

The other problem is that you cannot buy much of them in the 2 issues at 15K each. Any ideas on that? can you buy them though a fund?

[wadisgod]

I know a guy who owns a chip shop. For several months he has been complaining about the price of cod.

Recently the "fishman" has told him that 7 out of 10 shops he supplies have been quite and guess what the price of cod has fallen 30%!

Daily evidence and opinion is discrediting the decoupling theory ( the BRIC economies will take up the slack when the U.S. goes into recession) The price of oil will therefore fall, indeed recent future trades are predicting lower oil prices. Commodities must follow oil down along with inflation. Who knows about gold? We will then have deflation!!!

If you want index linked stock why not buy Gilts?

[ursamajor]

This is most interesting! I had assumed that if RPI became negative, as you might expect in a bad delfation, that Index Linked Goverment Bonds would reflect this. Am I wrong? I hope so!

The other problem is that you cannot buy much of them in the 2 issues at 15K each. Any ideas on that? can you buy them though a fund?

As a proud owner of both 3-year and 5-year i-l certs I can confirm they do not go down in any year there is deflation - it's in the small print that comes with the certs. But, yes, you are correct that there is a 15K limit on each flavour. But be aware that new issues come out regularly and you can invest more as they emerge. Also you can 'roll-over' certs when they mature - including interest earned to date. So over a few years it's possible to build up a substantial holding, more so if (like me) you are one member of a duopoly in which each person has a seperate allowance. Admittedly this may still be inadequate if you are looking at investing millions but fortunately this is not a problem for me :-)

UM

[wadisgod]

Are perceptions shifting?

http://www.ft.com/shortview

[tenant447]

If you buy index-linked gilts you get protection whatever the level of inflation. In fact deflation is best as there is a stop-loss on them - they do not go down in value in any year in which there is deflation. This means, ironically, they outperform most assets during deflation. If you believe deflation is very likely then you can up your returns by mixing in some fixed-interest gilts but they seem poor value at current levels and I would still go mostly i-l flavour.

Of course, even i-l gilts are still a form of debt and a bit of gold is still worth having as insurance against default.

Are you confusing NS&I Index-linked Savings Certificates with HM Treasury Index-linked Gilts?

The former are deflation proof and non-tradable.

The latter are openly traded, e.g. on the LSE, and will rise and fall in price according to inflation/deflation expectations and market sentiment.

[ursamajor]

Are you confusing NS&I Index-linked Savings Certificates with HM Treasury Index-linked Gilts?

The former are deflation proof and non-tradable.

The latter are openly traded, e.g. on the LSE, and will rise and fall in price according to inflation/deflation expectations and market sentiment.

good point. I've only ever bought the saving certs so cannot speak knowledgeably about the tradable gilts. If you buy the latter at issue and keep them to redemption (i.e. no trading) and in the interim there has been deflation, do you lose money - i.e. do they track the deflation or do they have the same stop-loss (on maturity) as the saving certs? I would have thought it would be impossible to sell them during deflationary times if there was no stop-loss. Genuinely curious.

rgds

UM

[wadisgod]

My belief is that we will see deflation in the West, but the jury is out on that, and it is too early to be sure. I am not sure myself, but, to me, it certaily looks more like deflation at the moment.

Any thoughts? Best wishes,

Housing Bear.

Could not have put it better myself Housing Bear.

How about reading this in the Telegraph. Second great article in three days from Ambrose. Anyone for Gilts?

http://www.telegraph.co.uk/money/main.jhtm.../cccomms104.xml

Edited March 5, 2008 by wadisgod

[wadisgod]

Yet another corker from Ambrose.

http://www.telegraph.co.uk/money/main.jhtm...7/ccview117.xml

[wadisgod]

Ambrose does it yet again!! A bit dry at times but you get the picture!!!!

This bear growls on

Posted by Ambrose Evans-Pritchard on 23 Apr 2008 at 18:15

Tags: Interest rates, Bank of England, Ben Bernanke, Global Economy

No bear wants to be a perma-pessimist, ever waiting for the sky to fall.

The Bank of England in the city of London.

Economic gloom: will blue skies return to the Bank of England?

So, sunk in a deep armchair with an optimistic bottle of Rioja (Baron De Ley Reserva), I have tried to tot up reasons why the great credit smash-up of 2007-2008 may now be safely over, heralding sunlit uplands once again.

1) Ben Bernanke has carried out the most dramatic rescue since the creation of the US Federal Reserve. His emergency rate cuts - 125 basis points over eight days in January - was a "game changer", as they say in London’s American Quarter, Canary Wharf.

By cutting rates from 5.25pc to 2.25pc since September, the Fed has averted 're-set Armaggedon' on the Greenspan mortgages – those floating rate 'teasers' taken out in 2005 to 2007. Payments will barely jump at all for most subprimers. Big difference.

The cuts are heavenly manna for the banks. These miscreants can now play the "steepening yield curve", using their monopoly privileges to borrow cheaply from the US Government and lend back expensively to the same US Government on long-dated bonds. This is the time-honoured method for rebuilding balance sheets. It works wonders. Even better (from the banks point of view), few people are aware of this massive bail-out.

2) Bernanke has accepted 'bus tickets' as collateral. The broker dealers (Bear Stearns, et al) can take their waste to the Fed’s Discount window, putting a floor under the entire shadow banking and $516 trillion derivatives nexus. Meanwhile, Fannie Mae and Freddie Mac have been armed with nuclear weapons to win the credit war. De facto, if not de jure, the mortgage industry has been nationalized. Big difference.

3) The Bank of England has woken up. Better late than never. As Professor Charles Goodhart (LSE and ex rate-setter) put it: "When you’re in a crisis, you deal with the crisis. Moral hazard comes when times are easier." Quite.

4) A dodgy one, this: China grew at 10.6pc in the first quarter. The BRICS - Brazil, Russia, India, China - are holding up. (If you ignore their galloping inflation, which you can’t, of course: current inflation merely means a future squeeze.) Actually, scrap point 4. It’s rubbish.

Still 1, 2,and 3, matter a great deal. Yet, I cannot really believe the tale of salvation. The Greenspan credit bubble and Europe’s EMU bubble (Club Med, Ireland, and ERM-fixers in Denmark and Eastern Europe) have together infused so much poison into the Atlantic economy that it will require a brutal purge - like chelating heavy metals from the brain.

America, of course, is already in recession – although the cascade of defaults, business closures, and job losses has barely begun.

Japan is in recession too, according to Goldman Sachs. It is still the world’s second biggest economy by far, lest we forget.

Britain, Ireland, Spain, Italy, and New Zealand, are tipping into housing slumps and demand implosions of varying severity.

Ontario and Quebec have stalled. Canada’s growth is the weakest in fifteen years, hence the half point cut by the Bank of Canada yesterday.

Australia is on borrowed time, whatever the price of coal and iron ore. Household debt is 175pc of disposable income, up in La La Land with England, Ireland, Denmark, and the Dutch. The wholesale funding market for mortgages that underpins this nonsense remains frozen.

Together these countries and regions make up roughly 45pc of the global economy, and over half global demand. My hunch is that this bloc will be sliding towards full-blown deflation within a year as the commodity bubble pops and job losses set off a self-feeding downward spiral.

The alleged parallel with the oil spike of the early 1970s is a snare. Debt leverage has been more reckless this time. It must contract more viciously. Inflation is less sticky (going down) in the Anglo-Saxon world, if not flexless Europe, where stagflation awaits.

If you think that core Europe - Greater Germany, Benelux, and the Scandies (France is faltering) - can somehow tough it out as the rest of the OECD’s industrial family hurtles into a brick wall, read the IMF’s “Regional Economic Outlook: Europe”, published this week.

The Fund has cut its eurozone growth forecast to 1.4pc this year, and 1.2pc next – with perma-slump pencilled in for Italy. This puts it at daggers drawn with the European Central Bank, the fervent apostle of decoupling.

Europe will suffer 40pc of the entire $940bn global losses stemming from the credit crunch. Euro banks alone will lose $123bn (compared to $144bn for the US). "Loss recognition will need to catch up," said the IMF.

"Liquidity remains seriously impaired. Lenders are tightening credit standards, particularly for loans to enterprises," it said.

"The deteriorating economic outlook could weaken European and corporate balance sheets appreciably," it said.

On it goes, more or less dire, if you adjust for the IMF’s softly-softly style.

The report contains a grim chapter on what may happen along the vast arch of over-heating silliness from the Baltics to the Black Sea, funded by Austrian, Swedish, German, Belgian, and Italian banks.

"Europe’s emerging economies are susceptible to financial shocks, which could make the situation dramatically worse," said Michael Deppler, the Fund’s Europe chief.

Last year, private credit grew 62pc in Bulgaria, 60.4pc in Romania, 55.2pc in Kazakhstan, 45pc across the Baltics. Need one say more?

Current account deficits have reached 22.9pc in Latvia, 21.4pc in Bulgaria, 16.5pc in Serbia, 16pc in Estonia, 14.5pc in Romania and 13.3pc in Lithuania. The gap has been plugged by foreign loans. These are no longer forth-coming. Spreads have ballooned by over 500 basis points.

"Banking systems that are heavily dependent on foreign borrowing to support credit growth could face a sudden shortfall," said the IMF.

Woe betide the creditors. Loans to the old Soviet bloc account for 23pc of the entire asset base of the Austrian banking system, and 10pc of the Swedish and Belgian systems.

As Europe’s drama slowly unfolds, the ECB is sticking defiantly to its orthodox line. The IMF suggests looking beyond the current food and oil spike (inflation is at a post-EMU high of 3.6pc), and preparing "some easing of the policy stance".

Axel Weber, the German Bundesbank chief and leader of the Uber-hawks, will have none of it. "I do not share the vision of the IMF," he said, tartly.

One notes that the Bundesbank was quieter when Germany was in the dumps and needed lower interest rates. It acquiesced in roaring money supply growth as inflation fuelled bubbles in the Latin Bloc – the cause of their current distress. Such is the hypocrisy of EMU. Beware the pious incantations by Mr Weber, a German nationalist in Euro-clothing. (I will return to the theme of Mr Weber in another blog.)

The ECB’s "error" will become clear over the next year as the house price crash across Club Med and Ireland combines in a lethal brew with the East Bloc credit deflation.

Germany will not be immune from the blow-back. It has funded a good chunk of Club Med’s foreign debts: Spain ($362bn), Italy ($275bn), Greece ($129bn), Greece ($98bn), and - honorary Club Med - Ireland ($123bn).

Far from being the shock absorber, Europe may prove to be the accelerator of this post-bubble denouement.

Once you add Europe to the Anglo-Saxon and Japanese sick list, you reach 60pc of world GDP, and two thirds world demand.

This leaves the global boom on tenuously narrow ground. Who is going to buy all those exports from China? Who is going to keep pushing commodity prices into the stratosphere? This bear growls on.

Good Rioja, nevertheless.

Posted by Ambrose Evans-Pritchard on 23 Apr 2008 at 18:15

[wadisgod]

Ambrose does it yet again!! A bit dry at times but you get the picture!!!!

AEP does it yet again. It aint to late to buy gilts

http://www.telegraph.co.uk/money/main.jhtm.../cnmoney111.xml

[ChumpusRex]

If you buy index-linked gilts you get protection whatever the level of inflation. In fact deflation is best as there is a stop-loss on them - they do not go down in value in any year in which there is deflation.

No you don't. Index linked gilts index both inflation and deflation. If you get deflation, both the capital and interest payments on an i-l gilt are reduced. Yes, if you buy a £100 i-l gilt, hold it for 10 years during 1% deflation - the underlying capital will be reduced to £90.40 - the interest payments you recieve during the term, will also be reduced in proportion with the underlying capital (e.g. a 1% index linked gilt would pay £1 in the first year, but only 90p in the final year).

Index-linked soverign bonds from other countries (e.g. Canada, US and much of Europe) do include a deflation floor, which will prevent the capital reducing below it's original value. However, gilts do not include this.

Gilts are tradeable, so they have a market value which is not just determined by their inherent value (value of their capital and interest), but by supply and demand for ultra-low risk debt, as well as inflation/deflation expectations and the availability of better yielding investments. [This market value also applies at issue, as they are issued at public auction].

[wadisgod]

Read it to the end!!

Merryn Somerset Webb: It’s time to form an orderly queue at Northern Rock

By Merryn Somerset Webb

Published: July 11 2008 18:19 | Last updated: July 11 2008 18:19

I’ve never been one for tying my money up in long-term products of any kind. But I’m beginning to find myself looking rather longingly at some of the fixed-rate savings bonds on offer.

Right now, Birmingham Midshires will pay you 7.17 per cent if you hand over your money for a year and Skipton Building Society will give you 6.99 per cent for three years. Want more? Northern Rock will give you 7 per cent for five years.

That sounds pretty tempting given that with the retail price index (RPI) at 4.2 per cent a lower rate taxpayer would have to be getting nearly 5.25 per cent in interest on their money just to be able to buy the same quantity of goods at the end of the year as at the beginning, and a higher rate taxpayer would need to make at least 7 per cent (after both inflation and tax are taken into account). There just aren’t any other “safe” investments that can pay this much – the best rate of interest you can get on an instant access account these days is 6 per cent.

The Northern Rock offer also makes sense because, unlike all the other banks and building societies overexposed to the end of the property bubble, its deposits are still 100 per cent government-guaranteed.

So go with one of these fixed-rate bonds and at least you have a good chance of ending up evens, or of actually making a real return on your money. And if inflation turns to deflation, as some think it will, you have a chance of making a very good real return indeed.

Right now, all the signs point to continued inflation. Food prices are rising fast – up 7 per cent in May alone says the British Retail Consortium (that’s £50 per average family). The price of imported goods into the UK is also rising at a rate of 8.6 per cent, a trend most analysts expect to continue as surging demand from emerging economies pushes up all commodity prices and as wages in developing countries keep rising. Then there are wages in the UK to worry about. If these can be controlled so can inflation, but with consumers squeezed between rising commodity costs and higher mortgage payments they aren’t going to take falls in their real wages – however short term the Bank of England might say they will be – lying down.

No, workers will surely have a go at demanding more. Just as they are in Europe. There, Jean-Claude Trichet, chief of the European Central Bank, has noted the 3.3 per cent rise in hourly labour costs in the first quarter of this year and started to warn of the dangers of this kind of second round inflationary effect: rising wages means rising costs which in turn means rising prices and then eventually even higher wage demands. Add it all up and there is every reason to think that the consumer price index and RPI should keep rising for now.

But while we should be very nervous about all this, there is a chance that it won’t last more than another 18 months or so. Why? Because to a large degree the inflation we are witnessing now is a function of the large amount of money sloshing around in the financial system, itself a function of years of very low interest rates and of a vast lending boom across the west – a credit bubble.

China could not, for example, be driving commodity prices higher in the way that it is had its export industry not been so boosted in the first place by credit-financed consumption in the US.

But this period of monetary expansion could be over. Lending is contracting very fast indeed in the west. Bank balance sheets are under enormous strain everywhere and bank shares couldn’t be doing much worse. So there is very little appetite in the financial system for shovelling money into the hands of binge shoppers, property lovers, big investors or, for that matter, even small businesses either here or in the US.

At the same time, consumers have turned from splurgers to scrimpers in a matter of months as their living costs have soared, their household wealth collapsed along with property and share prices and their employment prospects became more bleak.

Look at it like this and as someone said to me recently, the inflation we are currently seeing is the “echo” of the credit bubble of the first part of the decade rather than something reflective of the state of the global economy right now. The end of it could see consumers too nervous to demand wage rises and possibly stopped from having to do so by a collapse in commodity prices anyway. Add in a nasty recession – in the UK, in Europe where the industrial production data is looking too weak for comfort, and in the US – and it is entirely possible that by the end of next year we’ll all be praying for a touch of inflation.

Expect, says Christopher Wood, an economist at CLSA, the Hong Kong-based brokerage house, “the unwind of structured finance and the related dramatic deleveraging precipitated by the housing market” to “prove to be much more deflationary phenomena in 2008 and 2009 than the cost push inflation generated by commodities.”

It is hard to know exactly when the current inflationary environment will tip into a deflationary one but if it happens (and this is still an if), the Bank of England, along with other central banks, will stop threatening rate rises and slash them fast instead, making the 7 per cent five-year offer from Northern Rock look like one hell of a deal in retrospect.

Just imagine how clever you might feel if you were getting that on your cash when base rates were down to, say, 2 per cent by the beginning of 2010?

And even if we don’t end up with real deflation, where else are you going to put your money in this environment? Not the property market. Not the stock market and not – with any real confidence in the short term – the commodities markets. Perhaps we should all be queuing at Northern Rock again – this time to put money in rather than to take it out.

Merryn Somerset Webb is editor of Money Week and previously worked as a stockbroker. The views expressed are personal. merryn@ft.com

This is the email i sent to our babe!

Hi Merryn,

I must say that I have followed your work for some time. Both in money week and the Sunday times. I have also watched several tv programs in particular the property price forecasts in which you stated the bleedin obvious that house prices were going to fall.

i have usually agreed with you (although I am still not sure about buying into the German property market, forgive me if that was not you) it is nice to read articles that agree with you when your own views differ from the crowd, I sold to rent mid 2005 and banked the cash.

Yesterdays article in the FT was exactly as I see it although I am I little more pessimistic and am in fear of a banking collapse, perhaps not complete but I feel until the us housing market stops falling there are going to be more sub prime losses realised and we are no where near there yet. On top of that the UK housing market is starting to sink like the Titanic slowly to begin with (yes I think this is slow) then it will plunge into an abyss, (lets not even talk about the state of Europe Irleland , spain etc.

So whats my point, you make no mention Gilts. If we agree Northern Rock is as safe as it gets in the UK then Gilts must be an option in an enviroment of deflation.

As I am just about to increase my holding of long dated Gilts i would be grateful of you comments.

Regards,

And this was here reply!

Dear Anthony,

I did forget to mention gilts – sorry. I’m afraid I can’t give personal advice so I’ll try and have a quick look at them this week, either in the FT or Moneyweek. Thank you so much for reading so much of my work – I’m glad you enjoy it. All the best, Merryn

Edited July 23, 2008 by wadisgod

[wadisgod]

All the money appears to be on inflation! Gold and oil.

What happens if we get deflation. When the U.S goes into recession and the BRIC economies are unable to take up the baton, the price of oil and possibly gold will fall. Gilts will be the place to be.

Discuss.

???? :huh:

[ursamajor]

No you don't. Index linked gilts index both inflation and deflation. If you get deflation, both the capital and interest payments on an i-l gilt are reduced. Yes, if you buy a £100 i-l gilt, hold it for 10 years during 1% deflation - the underlying capital will be reduced to £90.40 - the interest payments you recieve during the term, will also be reduced in proportion with the underlying capital (e.g. a 1% index linked gilt would pay £1 in the first year, but only 90p in the final year).

Index-linked soverign bonds from other countries (e.g. Canada, US and much of Europe) do include a deflation floor, which will prevent the capital reducing below it's original value. However, gilts do not include this.

Gilts are tradeable, so they have a market value which is not just determined by their inherent value (value of their capital and interest), but by supply and demand for ultra-low risk debt, as well as inflation/deflation expectations and the availability of better yielding investments. [This market value also applies at issue, as they are issued at public auction].

Thx for coming back on this CR. Makes the case for holding i-l saving certs (as opposed to tradable i-l gilts), which DO have a stop-loss at zero inflation, even more compelling! I guess that's why there is the limit on holdings.

rgds

um

[wadisgod]

Thx for coming back on this CR.

CR are has'nt come back on this!

[wadisgod]

Post #21

HPC Poster

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Group: Members

Posts: 115

Joined: 21-June 05

From: North London

Member No.: 2,261

QUOTE (wadisgod @ Jan 7 2008, 09:56 PM) *

All the money appears to be on inflation! Gold and oil.

What happens if we get deflation. When the U.S goes into recession and the BRIC economies are unable to take up the baton, the price of oil and possibly gold will fall. Gilts will be the place to be.

Discuss.

???? huh.gif huh.gif huh.gif

[ursamajor]

What happens if we get deflation?

Hi wadisgod

For deflation to happen there needs to be a reduction in money. Debt default cannot do this alone - the money created on the other side of the glass must also be destroyed. This means bank default on savings and deposits. But this will not happen if HMG bails out the banks and underwrites all deposits. It could be argued that HMG will run out of money and be unable to back deposits but this has never happened in all of the history of life on fiat currency. Given the option between deposit destruction (lots of bank runs) and more borrowing (leading to inflation) I know which side of the bet I'm happier on.

um