Friday, May 8, 2009

Blame this crisis on the myth of inflation

Blame this crisis on the myth of inflation

"Debt and house prices were shooting up. But keep one thing under control, we were told, and everything would be fine"

Posted by becky @ 12:28 PM (1054 views)
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8 thoughts on “Blame this crisis on the myth of inflation

  • All obvious, in retrospect. However, the mistake of leaving the major inflationary asset class out of the indices was also. See my debate on this very issue with John Redwood 1 year ago:

    http://www.johnredwoodsdiary.com/2008/05/17/why-has-the-government-and-the-bank-of-england-failed-us-on-inflation/#comment-20645

    Unfortunately, the Times have disabled further commenting so I can’t post this there

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  • refusetobuy says:

    A good article. I mostly agree. A two points

    “For some reason, never adequately explained by any bank auditor, a bank’s “loans” became “investment”.

    The SIV was like selling on the loan. The idea was that it was completely separate from the bank, so there was no reason to account for them on the balance sheet. The downfall was the clause that the originating bank had to lend the SIV money if it couldn’t find it elsewhere. This meant that the bank didn’t manage to absolve itself of financial responsibility,

    “These debts now deserve triple A ratings. Why? Because they are insured.”
    The insurance promised triple A. Unfortunately the people who promised it were not triple A (because they promised the insurance).

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  • 51ck-6-51x says:

    refusetobuy, good observation on both points.

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  • mark wadsworth says:

    By The Times’ standards, that is a cracking article.

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  • lol @ markw, you are quite right! The Times’ office must be a strange place, with such contrasting viewpoints.

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  • Cashrichassetpoor says:

    Would targeting inflation work if it targeted RPI rather than CPI?

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  • I have been saying for a very long time, both here and elsewhere; that inflation targetting was a policy that would ultimnatley have to be abandoned.

    Now The Times has given space to someone who is not a frequent contributor, to argue against the logic of the idea, and to highlight that the ‘wrong sort of inflation’ was being targetted.

    House price inflation IS inflation, and very significant to everyday lives. Debt inflation (over and above price inflation) shows that the economy is ultimately on an unsustainable course.

    But if you want to steer an economy on a steady course, the measure to watch is trade balances. Export too much and you get deflationary pressures, export too little and inflation comes knocking.

    Every government should seek to achieve trade equilibrium as their primary objective. Once that is achieved, one can aspire toward other goals.

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  • uncle tom. Yes, inflationary effects affect different individuals differently; my inflation is different from yours. A sovereign should think of itself as a unit in which case the trade balance and net flows of the currency are what must be monitored and coerced, if anything.

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