Sunday, February 16, 2014

Girls no hair pulling!

The Debate: Is there an inflation bubble?

Liam Halligan and Tim Congdon debate UK inflation vs deflation. For whats its worth, I wouldn't save in sterling and I used to be extremely convinced by the deflation argument. Sterling halves in value every ten years.

Posted by stillthinking @ 03:25 AM (3237 views)
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2 thoughts on “Girls no hair pulling!

  • Stillthinking – Sterling halves in value every 10 years……what in purchasing power…..or against other currencies? Rings true against the DM between 1967 and 1987 with a drop from 10 to the pound to around 2.5 in that period.

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  • Actually I read this number. Its based on the money supply increasing by 7% a year. 1.07×1.07… for ten years i.e. sterling halves in terms of itself by virtue of doubling in quantity which is measured by the fixed amount of available residential property.

    I just reference this article, which does look interesting, because its second chart is “UK Money Supply Growth Rate”
    http://www.cato.org/blog/uks-capital-obsession

    If the economy grows by 3.5% say.. then more economy, more economy per extra money, so inflation rate would be 7%-3.5% = 3.5% . Cue crowing from Brown and modest blushes from King. Except for 2 things;

    1) The amount of property with planning permission doesn’t increase at all. So you just see the 7% growth per annum.
    2) China is online and starts dumping cheap goods confusing whether there is GDP growth or the perception of productivity from cheap imports. The target King has is various measurements of retail prices.

    You will essentially always lose from sterling if the amount of sterling increases more than something that is a fixed quantity and is kind of monetized or at least perceived to be so, like housing. Which is why savings rates -must- normally be a few percentage points higher than inflation, otherwise you would be nuts to save in sterling. So this increase in monetary supply has been created by the private sector going mental on borrowing. But its all unproductive and people have no faith and go straight to panic.

    This is why the measurement of the output gap is so -important-, because it is the measure that the economy can -grow- at and is accordingly a component that monetary supply can be expanded. If for example you think there is a big output gap and expect 2% growth, then you can expand 6 percent, which would be 4% inflation moderated by the continuing flood of cheap global labour competing. Maybe that brings it down to 2 or 3%. Great. Except if your output gap guess is wrong and the 2% growth is in fact 0%, then inflation comes in at 4 or 5%. Not so great. 4 or 5% looks terrible even against RPI figures ! Your diminishing share of sterling looks -even worse-.

    Against that you can consider savings rate in the UK that are certainly not a few percentage points above inflation, most certainly not, and you can consider the credibility of the UK’s output gap given that business is already screaming for imported labour e.g. ICT and skilled worker visas starting up for IT this year, and to what extent redundant state workers can transfer.

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