Monday, Oct 12, 2009

Lunatics and Asylum spring to mind

Citywire: Blanchflower recommends 5% inflation to reduce UK debts

The government should engineer and tolerate a burst of high inflation over the next few years in order to reduce the real value of Britain’s debt mountain and bail out mortgage borrowers in negative equity......................................

Posted by jack c @ 05:54 PM (2877 views)
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1. matt_the_hat said...

The professor declares himself bemused by the Conservative plan to slash public spending in order to balance the books, arguing that it was ‘hard to see any group that stood to benefit from their proposals.’

Maybe anybody under the age of 40 for a start dickh3ad

Monday, October 12, 2009 05:56PM Report Comment

2. jackas said...



Monday, October 12, 2009 06:03PM Report Comment

3. shipbuilder said...

Didn't Uncle Tom suggest exactly the same on here? UT, is the something you're not telling us....? ;)

Monday, October 12, 2009 06:06PM Report Comment

4. britishblue said...

I think the bigger picture here is that the Conservatives have now made a stand on reducing the debt, they will almost certainly get into power and the country will almost certainly go into a deeper recession when the fiscal stimulus is turned off and the books are rebalanced.This will almost certainly lead to a dramatic drop in house prices over the next few years.

Both Blanchflower and Matt the Hatt are both right depending on which perspective you look at. The younger generation who hold onto jobs during this time period will benefit through lower house prices if Conservative austerity is put in place. The home owners will benefit (at least in the medium/ short term) if there is a boost of inflation.

However, one thing that hasn't been mentioned here is the role of interest rates when inflation gets out of control. Once you have inflation running above 5%, the jump to 7, 9, 10% isnt that great and companies start wacking up prices, wage claims go up, etc.

We live in interesting times!

Monday, October 12, 2009 06:07PM Report Comment

5. chrisa said...

'The government should engineer and tolerate a burst of high inflation over the next few years'

We've had high inflation for years in house prices thanks to people Blanchflower and the BoE deliberately ignoring it when it applied to housing. The people who will be 'tolerating' this inflation he is calling for will be the ones seeing their currency trashed not the ones who want to see rising asset prices. Why should the prudent be shafted to bail out the profligate and greedy? What is so bad about negative equity? If I bought an asset and the price fell why should I expect to be bailed out? Would I really want the currency trashed just to do this?
The 'threat' of deflation and negative equity are being used as a smokecreen to justify massive money printing the real purpose of which is to cover government debt and reinflate an asset bubble that should be allowed to correct. Utter disgrace, as is Blanchflower himself.

Monday, October 12, 2009 06:13PM Report Comment

6. c'mon correction said...

@4 - exactly britishblue - if inflation is let go to 5%+ say, then there will be a push on higher wages even in a tighter job markets. The public sector wage bill increases (and there will be, unless major strike action etc, which punishes). Also it would hit the real bottom line of every business in the country. We would also go even further by pricing our labour higher to make us even more un-competitive with other nations.

I still think we've got one of the most dovish central banks, and I wouldn't trust them to hike rate rises to stop second- round inflation effects when it's necessary.

No, Blanchflower.

Monday, October 12, 2009 06:19PM Report Comment

7. crunchy said...

Hyperinflation? I wonder why I even suggested it. lol

Monday, October 12, 2009 06:28PM Report Comment

8. fallingbuzzard said...

Yes, well thats why he's no longer a member of the Monetary Policy Committee.

Monday, October 12, 2009 06:29PM Report Comment

9. shipbuilder said...

I suspect that what Blanchflower says is exactly the government's intended course of action. If I was cynical, I might even speculate that Blanchflower knows this already and is simply pre-empting it.

Monday, October 12, 2009 06:36PM Report Comment

10. This comment has been removed as it was found to be in breach of our Blog Policies.


11. stillthinking said...

You can't take former or current BoE members seriously. Their role is to credibly promise to act irresponsibly, to kick start spending. You could equally well argue that if Branchflower feels the need to say this, something bound to rock sterling to the core if taken seriously, that his analysis shows that reflation attempts are failing.

The bank can only choose to let inflation run amok up to 5% if they have some inflation to begin with, as they are constrained by zero base rate they are back to square one, as monetary policy can't stop the onset of real interest rate increases.

They don't have any inflation to play with, so Branchflower can yap as much as wants. The time to co-opt savers into rescuing the economy was when they lost their savings in the banks, at which point anything over 50K should have been converted to bank equity, rather than a much later purposefully thieving inflation tax which would also hit the real economy.

Although his idea about replacing the CPI with an alternative index including house prices looks like his one good idea, if that was being currently applied then the recent fools bounce in house prices would have necessitated raising the interest rate, something I am sure he would be most against.

If he wants people to start spending, instead of threatening them, why doesn't he tell his friend Brown to provide an environment where there is a desire to spend? All the under 35s, OUT, they have to save for a home deposit, no fridges, TVs, sofas, kids, because home comes first. All the 55s, OUT, scared of old age poverty. All the ones in between scared of job losses.
Why not embark on a large scale house building programme now? We will end up with some kind of New Deal type working programme anyway.

Basically Branchflower sees deflation and realises the only tenuous connection left between the refusal of the real economy to spend and borrow is his gob.

Monday, October 12, 2009 06:53PM Report Comment

12. paul said...

This has been tried before.

I hate to sound like I'm repeating myself, but the Bank of Japan tried to inflate itself out of trouble too many years ago.

It won't work, as much as Blanchflower (and probably the conservatives and labour government) would love it to work. Unfortunately the opportunity to solve the problem that way has come, and long gone. There will be no inflation unless it is created by currency devaluation (I guess we know what's behind the recent statements by Mervyn King talking the GBP down).

The problem (and it is a huge one) is that talking the currency down is an extremely risky business - if there is a proper run on the pound (if the pound gets ground!) inflation could soar and develop into stagflation, all the while having very little effect on the downward trend of house prices.

Monday, October 12, 2009 06:54PM Report Comment

13. crunchy said...

Stop my sides are hurting.

Monday, October 12, 2009 06:57PM Report Comment

14. stillthinking said...

Put it another way, suppose instead of Branchflower this statement had come from a Bank of Japan official. A 5% target announcement from an organisation that hasn't ever managed to push inflation to even a measly 1% over -two decades-!!

The whole danger is that the UK government can't reflate -at all-, not what number magic wish they pick, or pronounce so sensibly.

Monday, October 12, 2009 07:01PM Report Comment

15. crunchy said...

12. paul said..."There will be no inflation unless it is created by currency devaluation."

Nuff said. Since when has long term concequences ever bothered anyone lately? Done deal.

Buy some cheap food now!

Monday, October 12, 2009 07:06PM Report Comment

16. Keith Thomas said...

Isn't this already happening? The 0.5% interest rates, QE is already fuelling inflation. Does anybody seriously believe inflation is 2% - use your eyes - inflation is already 5% atleast. Debts both household and government are to be inflated away - as usual. What we should be doing is looking how to take advantage of the inflation by spotting the next bubble - commodities ? / BRICs? / Property?!

Monday, October 12, 2009 07:15PM Report Comment

17. The Baldman said...

A dangerous idiot looking for a village. So savers pay for the feckless borrowers

Monday, October 12, 2009 07:17PM Report Comment

18. Cheekie Charlie said...

Thats sorted then next pay rise 5% to help me pay off the debts.

Monday, October 12, 2009 07:17PM Report Comment

19. alan said...

C'mon Blanchie, what about all my mums savings which recieve low interest because Westminster wants to keep house prices high and help those who have bought what they can't afford!. Where is the justice and fairness in that?

Thanks Crunchy, I'll tell my mum to buy tinned stuff before it goes up.

By the way, how does Westminster jiggle the figures so inflation comes out at 5% ?

Monday, October 12, 2009 07:17PM Report Comment

20. Crunchy said...

stillthinking we shall see.

Monday, October 12, 2009 07:21PM Report Comment

21. crunchy said...

stillthinking we shall see.

Monday, October 12, 2009 07:22PM Report Comment

22. paul said...


The media would have a field day on that kind of thing. It is one thing maintaining the illusion that inflation is a force of nature, but quite another to actively court it - a very dangerous move for Bank of England credibility ...

"Bank of England Governor induces stagflation with careless words"
"Bank of England's Credibility Questioned After Reckless Statements From Governor"
"Economists Puzzled By Inappropriate Disclosures From Bank Officials"

Monday, October 12, 2009 07:22PM Report Comment

23. crunchy said...

Bank of England's credibility LOL LOL LOL LOL

Paul I will say it again...... We shall see.

Monday, October 12, 2009 07:26PM Report Comment

24. crunchy said...

It does not have to happen like that paul. Watch this space. Things may get interesting.

Monday, October 12, 2009 07:28PM Report Comment

25. wdbeast said...

Crunchy@15 - "buy some cheap food now!"

When do you think the brown stuff will hit the fan?

Do I have time to take action, or is it already too late?

Monday, October 12, 2009 07:31PM Report Comment

26. smugdog said...

As Crunchy says, it's a done deal, accept it and act accordingly.
Since when did anyone here genuinely think that our leaders would act in any other manner.
At any cost they told us.

(Lyrics by G. Brown, or was that Secret Affair, back in the good ol days)

But this is my world today
My world your living in every day
And this is my world today
And I couldn’t have it any other way
In my world, my world, my world, my world today
Forever and ever,
Forever and ever,

Monday, October 12, 2009 07:32PM Report Comment

27. drewster said...

12. paul said... "talking the currency down is an extremely risky business - if there is a proper run on the pound inflation could soar and develop into stagflation"

Quite right. What would the foreigners who buy our gilts think of 5% inflation? What indeed would domestic pension funds or other bondholders make of it? If there was a gilt-buyers strike, the BoE would have to intervene and buy up the bonds instead. The pound would plummet.

For comparison, the Argentinian peso fell 70% in their 2001 crisis; the Mexican peso fell 45% in their 1994 crisis; the Russian ruble lost 70% in their 1998 crisis. Britain would join this illustrious list; although we've already lost some 25-30% against the euro.

Monday, October 12, 2009 07:37PM Report Comment

28. quiet guy said...

Great posting, Jack C!

It may be possible to implement Blanchflower's proposed attack on savers and pensioners but without wage inflation, this attempt to help people paying off debts could backfire quite badly. The real value of debt will decrease but with everything rising in price, how many will not be able to stay solvent long to benefit? Adding property to the CPI is quite a good idea but it won't make the bills go away. Throw in the different policy choices depending upon who wins the election and as Crunchy says, it may get interesting.

Monday, October 12, 2009 07:45PM Report Comment

29. phdinbubbles said...

Just for old times' sake, a tin-foil hat inflation thread picture:

Monday, October 12, 2009 07:50PM Report Comment

30. icarus said...

drewster @23 - what would the foreigners who buy our gilts think of 5% inflation? In the 70s and early 80s inflationary years any return gilt holders received (nominally quite high) was more than eaten away by inflation AND they were taxed on those returns. Result - UK gilts got such a bad rep that during the 80s nobody would buy them unless they received a substantial REAL return. That meant paying out huge sums to gilt holders for 20+ years. That particular lump wasn't digested until after 2000 (I think it was about then that Gordo decided he had loadsamoney to play with.)

Monday, October 12, 2009 07:53PM Report Comment

31. chrisa said...

This sounds like propaganda that the BoE and MPC would love to issue themselves but can't. 'Lucky' they now have a man 'on the outside' who is free to make the comments and soften the public up. Was his recently reported rift with King a trifle overdone but good cover for his new role?

Monday, October 12, 2009 07:55PM Report Comment

32. japanese uncle said...

Then GBP1 = 0.7 euro = JPY80 is likely

Monday, October 12, 2009 08:01PM Report Comment

33. braindeed said...

And now the contrarian view:

Blanchflower is right.

There is an argument to say that capital accumulated in the boom years is just as tainted as all the other asset prices in the lead up.
We, as an electorate, tolerated and even celebrated the 'feel-good' factor that has kept inept and sometimes even corrupt executives in power since Regan/Thatcher.
Okay, the cry goes up …..’Not me – never me’, but the whole pile of steaming crepe that passes for ‘assets’ (paper, commodities, or bricks and mortar) was over-inflated by the supply of cash that was released by laissez-faire. And there can be no doubt that the majority colluded at the ballot box – so a correction has to be felt by everyone.

It’s just the way it is – but if I could, I’d ensure that the bankers paid a punitive price…..fat chance though. The guff I hear in here reminds of post war Germany – nobody was ever a Nazi, resistance fighters all

Monday, October 12, 2009 08:09PM Report Comment

34. uncle tom said...


No, my name is not Danny Boy, and I have very little time for this guy..

..but yes - I have advocated a 5% inflation target for quite a long time now, as a realistic route out of this mess.

We need to burn down debt, both public and private, and 2% is simply too slow.

5% inflation will be hard on the pension funds; but as I have said before, a core problem that we face is the excessive expectations of the older generation of the younger.

5% inflation is part of the solution (if it can be held that low, post QE..); and another part is an early rise in the state pension age, for both men and women, and not excluding the public sector.

If the public sector continues to retire early, then the state pension age will have to rise to 70 + with heavy increases in taxation for all.

If everyone retired at 68 - public, private, men and women alike - the tax pain would be much easier to bear.

- bring it on - not in ten or twenty years - but now..!

Monday, October 12, 2009 08:56PM Report Comment

35. braindeed said...

Double tops, UT

Monday, October 12, 2009 09:00PM Report Comment

36. tick tock said...

Re - 5% inflation will be hard on the pension funds

.....depends how the pension funds invest in preparation doesn't it?

Monday, October 12, 2009 09:09PM Report Comment

37. crunchy said...

21. wdbeast

I think the brown stuff will start to hit the fan again in 4 to 6 weeks with Sterling me thinks. Like it hasn't already, but there is more to

come IMO.

As far as food goes, that's personal. You go for Quality or Budget Frozen or dryed. Personally I have enough for 6 months and I have

saved by doing this already. I also store food because I don't want to jump through possible hoops getting it in the future. If I were an

American I would stock more. The way I see it is that I can't go wrong. Hope for the best, prepare for the worse!

There, and I didn't even mention GM food programmes. If anyone thinks that we will muddle through this without serious backlashes

you are welcome to your beliefs.

Monday, October 12, 2009 09:44PM Report Comment

38. braindeed said...

Edvard @ 33

Care to offer a synopsis, without prejudice?

Monday, October 12, 2009 09:52PM Report Comment

39. mark wadsworth said...

"Whatever it takes"

Monday, October 12, 2009 10:02PM Report Comment

40. crunchy said...

34. braindead.

Prejudice= is just another word for choice.

Synopsis= I thought I already had, but some events are beyond pre analysis as most on here know.

Gut= is another word that goes with feeling but also needs feeding.

Monday, October 12, 2009 10:18PM Report Comment

41. crunchy said...

Example= I wished I had been prejudice about property and the law of economics to date.

Hope you get my drift!

Monday, October 12, 2009 10:27PM Report Comment

42. braindeed said...


I asked because I believed your dayjob involved rational number crunching and probability analysis - you usually present coherent arguments, and given that background, am genuinely interested in hearing the promptings of your 'gut'.
'Without Prejudice' should be read as a phrase - impying 'a right to keep information from being used against' you (or argued with, more importantly)

Monday, October 12, 2009 10:33PM Report Comment

43. mander said...

Is Blanchflower's statement proof that housing bubble has been engineered as well? Inflating assets to get rich is economic wisdom?
Inflation means unemployment even for highly skilled. Forget underwriting the debt of irresponsible. Wise and honest people always pay their debts.

Monday, October 12, 2009 10:44PM Report Comment

44. crunchy said...

38. brainweed said..."I asked because I believed your dayjob involved rational number crunching and probability analysis." Wrong.

"you usually present coherent arguments." News to me as I usually like to throw in some abstractions for fun and quicker posting.

'Without Prejudice?' Never said it.

Monday, October 12, 2009 11:05PM Report Comment

45. drewster said...

icarus @ 26,

Thanks for the clarification. It's interesting that despite high gilt rates in the 1980s, they still managed to get a housing bubble in the late 1980s / early 1990s.

Monday, October 12, 2009 11:29PM Report Comment

46. general congreve said...

Tick Tock @32

The pension funds will run for cover me thinks, Golden Cover, according to a MoneyWeek article I read today.

Gutted about sterling. Any massive gains I make by holding 50% of my cash assets in gold will probably be offset by the devaluation of the other 50% sterling. I'll probably just be back to square one, ending up perfectly hedged but no further forward financially was not the plan, glorious retirement and an easy life was. F$CK YOU BROWN!!!

Should have got me some AUD, CAD and JPY when the picture was a little better, but I'm new to this finance game and I'm still learning the ropes, too little, too late it would seem. If I get out of sterling now they'll probably be some unprecedented bull market in sterling and I'll lose out, just look at the stupid stock market in the last seven months for crying out loud.

At least I have a house, feel sorry for you guys reading some of the topics going on, seems there's a lot of doubt about people missing the boat thanks to Brown's insane policies. The guy has really screwed the prudent, so once again on your behalf, F*CK YOU BROWN!!!

Monday, October 12, 2009 11:38PM Report Comment

47. crunchy said...

42. general congreve

We are all net losers in the end. That's how it works. Avoiding some of the pitfalls is a full time job and a leap of faith.

Tuesday, October 13, 2009 12:01AM Report Comment

48. nopensionnohouse said...

"Lunatics and Asylum spring to mind"

How apt. Usual suspects ruining this thread. The loons are back!

Tuesday, October 13, 2009 07:49AM Report Comment

49. Agentimmo said...

@30. uncle tom said...
"We need to burn down debt, both public and private, and 2% is simply too slow."

UT, why don't we ask the debtors just to pay it back and leave everyone else out of the mess?
They made their bed, so they should lie in it.
I'm getting to the point where my next move will be to take on debt for the next 10years , safe in the knowledge that I'll never have to pay it back. I'll default, leaglly, with the aid of the govt.
Of course, I'll keep my real savings far from their grasping hands. But for day-to-day living, housing etc, I can't see any risk or pitfalls.
Can you ?

Tuesday, October 13, 2009 08:54AM Report Comment

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52. cynicalsoothsayer said...

Inflation doesn't cure anything. It is only changes the numerical value of things. (Hyperinflation is bad as it causes loss of faith in the currency.) Blanchflower must know that 5% inflation will make mortgagees pay at least 7 to 10% which, so their wages will naturally increase at the same rate to cover it.

There's plenty on trackers paying 1p/month. Are they ready to pay realistic interest rates?

Tuesday, October 13, 2009 10:15AM Report Comment

53. ontheotherhand said...

He criticises Osbourne talking about default, but praises talk of aiming for inflation. Can anyone tell me the difference from a foreign investor in our bonds point of view? Let's say the government announced it would default on 3% of its debt each year, but hold down inflation to 2%. Isn't that roughly the same detriment to the investor as inflation of 5% with no default? Isn't inflation just steady technical default?

Tuesday, October 13, 2009 10:21AM Report Comment

54. cynicalsoothsayer said...

Yes OTOH, inflation is just a stealthy technical default, but is inevitably counteracted by the investors demanding higher returns to compensate. The only advantage from inflation is a political feel good one, in that everybody gets a raise each year. Blanchflower must think that you can have 5% inflation without paying for it.

Tuesday, October 13, 2009 10:34AM Report Comment

55. nomad said...

"The only advantage from inflation is a political feel good one, in that everybody gets a raise each year."

Is this set in stone? I see inflation with growing unemployment, static IR and level or lower wages.

That's austerity for you.

Tuesday, October 13, 2009 01:22PM Report Comment

56. luckyjim said...

This is, and always has been the most likely outcome. We can't get out of the credit crunch without becoming a little bit poorer. Inflation is the most politically acceptable way of doing that. You can complain about how 'unfair' it is or you can position yourself to benefit from it.

Saturday, October 17, 2009 12:33PM Report Comment

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