Friday, 19 June 2009

What? More bitterness?

My recent post on inflation upset a minority of readers. The criticisms took three forms:

Inflation – its not going to happen

Despite the huge increase in monetary growth, some are profoundly skeptical that inflation is going to pick out. Of course, no one can know what the future will bring. I could be wrong when I say that inflation will rise. Furthermore, I would be happy to be wrong. A 5 percent by the middle of next year inflation rate is the last thing I want to see.

In the short term, I expect inflation to keep on falling. By the late summer, it could be as low as 1.5 percent. The short period deflation last winter did knock the wind out of rising prices.

However, that stopped in February, and since then the monthly inflation rate has been painfully high. By next winter, I expect inflation to rise, and within two years, it could be a serious problem. By that, I mean a rate somewhere between 5-10 percent. If the MPC raise rates, then this prediction is nothing more than a gloomy alternative scenario that an appropriate policy tightening successfully avoided.

With each passing month, we will pick up more information about the likely path of inflation. The following simple rule will help enormously. If the monthly inflation rate is 0.15 or lower, then the Bank of England can rest easy. It will easily meet its inflation target. If the monthly inflation rate is about 0.3 percent, then it is in trouble. We can be fairly confident that inflation will hit 4 percent by December. Of course, if the monthly inflation rate is consistently negative, we have deflation.

How dare you suggest an interest rate rise!

Some people become extremely agitated by the idea that the price of money should increase. Some think that rates should remain low in order to help homeowners pay down their ridiculously large mortgages. This amounts to an argument that savers should subsidize borrowers. Personally, I don't see any compelling reasons why this should be so.

Others seemed to think that low interest rates will sustain the economy and keep unemployment at bay. I have a lot more sympathy for this argument. Recessions are nasty and miserable.

However, historical experience suggests that a surge in monetary growth can only have a temporary effect on output and employment. In the long run, more money means higher prices. I wish that wasn't so, but it is, and denial helps no one.

You are just a bitter renter

Well, I've never tried to hide that fact. It says it on my profile in proud letters. If you don't like the bitterness, then this isn't a blog for you. Move on, find your happiness six elsewhere, because I'm not going to provide it for you.

Besides, bitterness is something that the Brits do very well. Personally, I don't feel the least bit isolated. This is the country full of anger and despair, and this blog in part, reflects that fact.

So, returning to the inflation question, who knows? Maybe everything will be all right in the end, and people can read this blog and tell me that I was wrong. I'm ready for that.


sobers said...

Politically, a social demcratic govt has only one way out of a debt trap as big as ours - inflate the debt away (hell, even 2% inflation per year reduces your debt by half inside 35 years). So thats where my money is.

The politicos will scream blue murder that they're determined to keep inflation under control. The reality will be different. I'm prepared to bet in 10 years time people will wonder why their mortage was a problem - they'll be earning a lot more (in cash terms) than now, and their house will be higher priced too.

The losers, as ever will be the pensioners and savers, who will see their lifes work stolen by the govt.

peterthepainter said...

there will probably always be 'flation....

sometimes in.. and others de..

governments do sometimes seek to create inflation which may happen eventually...

they will not be able to arange goldilocksflation...

the main ingredient will be property...

while property prices big inflation

the property markets here and in ireland and the US ard damaged goods for some while yet...

once burned, twice shy...

remember..the house ATM is history...

for now...

Anonymous said...

You are so on the mark.

Anonymous said...

I always read your blog, and I sometimes comment that I don't believe in your inflationary stance.
However, as you take care to explain your view now, it is the same as mine, deflation now then inflationary problem. I think though that the deflationary stage is very sticky, and self-reinforcing, so you can't know how long it will last.
If we all had a million quid in the bank and refused to spend, prices would fall, and how can you anticipate the collective realisation that the money won't be buying as much as you thought.

I really do appreciate your blog.

Laban said...

The news this morning - "why fixed mortgage rates are rising" - apparently 5 or 6% now.

Liam said...

The BoE has the debt money flood gates open as wide as possible and still we have FTB mortgage rates around 6% and climbing.

The only way is up for interest rates and therefore I think the real pain in the housing market has yet to kick in.

PS alice thanks for this blog, its refresing to have the facts presented rather than the endless 'green shoots' spin from the MSM.

manfromthefuture said...

Kids are paid to countersay bloggers, as well as making glowing reviews for bad products. its the new advertising and has not escaped politicians. The more personal the attack, the more you know you're right. vast inflation is most certainly on its way.

Anonymous said...

Chin up Alice: you are awesome. I read a great deal of financial commentary and analysis all over the world, and I like your take on things, I like the speed of your updates, I like your online personality and tone. The information on your blog has contributed to saving my financial ass and thank you for it.

Laplace77 said...

Hi Alice,

you wrote:
Despite the huge increase in monetary growth, some are profoundly skeptical that inflation is going to pick out.

so I gotta tell you I'm one of those, and why.

Do you remember the good old boom times?

What happened at that time, considering the amount of money on the markets?

It happened that lots of people with 50K ($, £ or €) bought a house for 300K.

Banks created 250K "from nothing", that money came:
- formally from fractionary reserve or from debt with investors or from cartolarization;
- actually from the future, were is going to get back in 20-30 years, by monthly payments.

It also happened lots of people and/or lots of developers sold these houses, getting 300K "cash", right into their bank account.

So, for each house sold, say 50K in the buyer account were transformed into 300K in the seller account.

These additional 250K, belonging to future economy, were put into the markets, as the sellers were able to use that money the way they liked.

(Notice I won't mention home-equity-extraction at this time, but that would add up.)

So, when that large amount of money was "injected" into the markets?

I mean, when that "huge increase in monetary growth" happened?

In the "good old boom times", not after the crisis exploded and governments "inject" money into the banks.

Money injected in the last few months is not reaching the real economy, is just kept by banks to rise their liquidity and "core tiers" capitalization indexes.

Last few months injection are nothing compared to the money "stolen from the future" by the bubble.

Did you ever considered such a point?


AntiCitizenOne said...

The question is really....

Can monetary inflation counter credit deflation?

I think not...

We can have both at the same time...

Bill said...

Laplace77 you don't know what you are talking about. there was nothing like the amount of money washing around the system in the "good old times" as there is now. Interest rates will rise as bond prices fall (as bond prices fall their yields rise as they are fixed yeilds) and the price of bonds is falling. Base rates may not rise until inflation is front and centre and it is politically acceptable to raise them, which it will be in the face of visible inflation. Inflation will not wait for growth. Iran has no growth but 25% inflation. Zimbabwe has no economy at all and millions of percent inflation. As bond prices of indebted countries fall (due to oversupply of the bonds to pay deficits) their currencies will fall (because foreign holders of said bonds will exit their positions, or stop maintaining the growth of their positions at the rate of inflation) and local currency prices will rise. this will be an effect of the inflation in the money supply that has ALREADY happened. The money can not sit in banks balance sheets, or the bond market indefinately. Who do you think you are kidding saying the money won't reach the monetary system, it is already in it via bank balnace sheets and the bond market (QE). If at any time confidence in the bond or currecny market is eroded by negative price action, the whole process will go into overdrive. Foreign confidence will only be restored through... go on have a guess... yep... higher interest rates!

Eric Djornes said...

Lol bill i think she thinks all bubble money came from thin air. It came from credit Laplace. Hence no major inflationary effect and credit crunch after bubble. Plus once "injected" from the credit market it was "consumed", ie exchanged for chinese electrical goods and fancy kitchen. Now all that is left is debt. This time round money really was created from thin air so look forward to inflation my friend in austrian economics. :)

QG said...

A very interesting blog post. Deep down, I think inflation is our future as well but I've become wary of making predictions about when inflation will take off. Our government, for all its faults, has done a reasonably good job of keeping the economy limping along when it really should have crashed. Of course, taxpayers and savers pay a price for bailing out losers but that's politics ...

Bitter? Moi?

Anonymous said...

There are political considerations to all this. I agree that there is likely to be a large inflation. I can see it already in my business, at my petrol station, and in my supermarket.

But the ECB is the Bundesbank incarnate. They are not going to allow a policy of unsound money in Europe. Our membership of the EU will put political and trade pressure on our country to toe the line. Once we are rid of the idiot Brown, the new government - with a 5 year mandate - can take nasty decisions, and pursue sound money policies.

I think a large segment of the population knows whats coming, and will be supportive of the harsh measures necessary to fix this mess. There is going to be a short term loss of the value of savings, but it will be compensated by the inflation crushing higher rates we are going to be seeing in a year or 2, and which will be the only way of beating inflation.

The argument of the 70's was decided. Inflation is the great satan. Most people know that. Only a few hundred of them are pretending its not going to happen, but they want to keep their jobs in Westminster. Fortunately they will be gone before 12 months is up.

mark said...

Although I'm 100% in the inflationist camp I do have respect for the deflationists as they do share with the inflationists a fairly bleak view for the future of the UK & US economies.

What I really don't understand are the "green shooters" - who appear to comprise the vast majority of economists and financial reporters. They seem to believe -atleast publically - that slow to robust growth (back to long term equilibrium) in a modest inflationary environment is just around the corner with governments balancing budgets in the medium term.

To believe in "green shoots" you have to believe that central banks printing money is a way to run an economy. These people literally have no problem with a money tree dispensing free money without consequence.

"Green shooters" also seem to think that things will carry on as before despite the blatant exposure of a 'housing bubble', 'financial bubble' and global trade imbalances.

On a personal level blind optimism is not always the worst strategy but on a societal level it is disasterous as if you don't accept reality there is zero chance of the necessary change taking place.

Laplace77 said...

@Bill, Eric:

maybe I don't know what I'm talking about, but what about this?

Isn't that creating money "from thin air"?

Only a fraction of the money lent to homebuyers was backed by real credit, I mean from deposits or money borrowed in turn by the bank or money got from cartolarization of previous debts.

During the "good old boom times" any bank was acting as a printing press: take a look at the currency-M1-M2-M3 chart.

Where did all that "money" came from, from 1995 to 2007?

If you say I don't know what I'm talking about, please answer these 2 questions:

- How much money was provided during these times, by fractional reserve?

- How much money is being printed by the FED now?

I guess it's 10:1 ratio, if you have real numbers, please provide them.

By the way, I like austrian economics' point of view, defining "inflation" as the rising in amount of money available, where rising price indexes are a consequence only.

My point is: much more money has been created "from thin air" during the bubble than is being created with FED,BCE,BOE,BOJ injecting capitals.

(If you have different numbers, please provide data and source.)

When all that money has been created, we saw little rise in price indexes for all stuff except houses (some define a bubble as a "localized inflaction", do you agree?), since housing was origin and destination of that additional money (and other goods benefited chinese imports deflation indeed).

I know the matter is complex and uneasy, but your objections considering state debt and bond yelds only do not help that much.

Especially if you consider we're not talking about 3rd world (Iran, Zimbabwe, etc), but OCSE countries.

It's easy to run away from 3rd world debt, pushing them to increase interest rates (and inflaction) to be attractive, when you have safer countries to lend your money to.

Nowadays, there's no safe heaven: if you won't keep your money lent to US, EU or JP debt, were are you goning to put this money?

More: according to austrian point of view, increasing money supply determines rises in price indexes; but that's true only if those who got that money is spending them.

Who got this money?!?

Middle class has been crunched worldwide, mass consumption is falling, there's general excess in production capaticy over demand.

When Japan was hit by its boom-bust in the 1990s, the rest of the world was still alive and kicking, how about today?


bill said...

I didn't say there wasn't easy money and monetary inflation in the boom. there was, lots of it. The chart, which i don't have for money supply increases but is easy to find, shows an exponetial rise through the boom period. but you will see, in 2008, the chart went parabolic. it goes from a relatively gentle ascent to a verticle moon shot. The (relatively) modest inrceases were absorbed in the boom to an extent by deflationary chinese imports, rising bond prices, strong currency appreciacion and massaging the numbers. I believe despite all that we still had 10% inflationary price increases in reality. It sure felt like 10%. With the vast increase in money supply in 2008, and no chinese import price falls to help and no strong currency effect to help and no rising bond prices to help this time will be much worse. And it wont require growth to kick start this. It will just be a lack of the above coupled with a much more aggressive increase in money supply. And then if confindence ebbs away, we will look like a banana republic, regardless of our "first world" or developed world status. with deficits of 12% of GDP, worse than argentina or pakistan, some could argue we already are banana republic status. If the eastern world rightly states the emporor has no clothes, we will have all those negative effects in spades and runaway inflation. Maybe that is what the powers that be want, as inflating away debt is a tried and tested means of dealing with a long term debt crisis, so don't be so quick to dismiss it as a likely outcome.

bill said...

P.S. If the above does happen, at least property prices will rise, although that could take a couple of years to materialise. That, the powers that be definately want, as it inflating away debt at an acceptable pace.

And as for where to put your money, gold of course. And keep it there until things have properly run their course.

boiling frog said...

I agree with Sobers that inflation is the only way out of the debt problem for the UK. I believe we might achieve this because we have the flexibility to sink the pound. It will be painful and we will run the 'Zimbabwe' risk, but if it can be achieved we can move on. I can see that with the defaults and writedowns, the credit deflation situation created by the banks may win out and we will be left with the Japanese style eternal deflationary depression. Devil and Sea, Fire and Pan, not a good position. Alice is right to be bitter about renting, especially now, as even the STRs are being forced to buy because their interest income no longer covers their rent, temporarily halting the crash.

fajensen said...

The chart, which i don't have for money supply increases but is easy to find,

Maybe something like this:

Note how The Great Depression is invisible!

Laplace77 said...


can't see the skyrocketing you're talking about:

considering relevant events, assuming Jan 2000 as "house boom start", here's what:

---------(Billions of Dollars)---------
Jan 2000____1121.9___NA_____4656.4___NA "house boom start"
Aug 2007____1368.1___22_____7284.9___56 "subprime crisis"
Oct 2008____1475.0___31_____7900.7___69 "lehman crack"
May 2009____1596.2___42_____8327.8___78 (latest data)

Now consider this, about bank losses in 2009 (IMF):

Global: $4.1tn, which equals to $4100 Billions
US: $2.7tn, which equals to $2700 Billions
EU+JP: $1.3tn, which equals to $2700 Billions

Assuming less than half of those losses are in USD,
how the M1-M2 figures would look like in Dec 2009?

How much money did the FED injected into the banks?
How much of this money is reaching the economy?

I see fajensen posted this (thx):

Why the hell banks are stockpiling these money?
To cover for future losses, maybe?


bill said...

sell bonds, buy gold, await your fate or shape it, its up to you. I'm no the only one who is predicting inflation. george soros, jim rodgers, peter schiff, nassim taleb, warren buffett, jim sinclair. All are predicting problem inflation. And that is just off the top of my head. who is putting their hard earned fortune into your theory? Not to mention Ben Bernanke has publicly stated his intention to bring about inflation. he himself has told congress an exit strategy without run away inflation is a much more presssing problem than deflation. A problem they are "working on", central banker speak for "we'll deal with that when it happens". The only person denying the inflation suply has been inflated is you. The debate has now moved on to how are we gonna deflate the money supply without reversing the economy when inflation returns. Notice i said when, not if.

Laplace77 said...


sure, pal.

If you're not happy theoryzing by analyzing numbers and thinking with your own mind, keep following what "gurus" says.

Of course some day in the future, inflaction is going to strike back, but...
...japanese are still waiting for that.

For sure, I won't buy inflactioned assets, like gold or houses, to save my cash from inflaction.

And I think your gurus are doing the same, despite what they may declare.


bill said...

I don't know what inflaction is, but gold is not a bubble. It is a store of value that protects against the effects of inflation. If you think inflation is not coming any time soon, keep all your money in bonds. I will trade what i see and you can trade what you see.

Those people i quoted aren't my gurus or idols. they are flesh and bones people that have a track record of knowing how these things work, and watching their speaches and postings over the years has reinforced in me how these things work. Their portfolios are published through SEC filings and disected in mainstream media outlets. I don't let them do my thinking for me, but when my thinking is reinforced by them i am encouraged. And when they ALL say the same thing, i sit up and listen. you don't have to though. It's a free world.

Good luck and best wishes.

Anonymous said...

"In the short term, I expect inflation to keep on falling".

This statement is completely at odds with your statements for the last twelve months. In August last year you had "inflation racing towards 5 percent and beyond". If you were so wrong then, why should we believe your predictions now?

"By next winter, I expect inflation to rise, and within two years, it could be a serious problem".

Whenever I see the word "could" in a newspaper article I replace it with the word "won't". As I said once before, your blog has deteriorated so far you could be mistaken for a journalist.

"By that (rising inflation), I mean a rate somewhere between 5-10 percent. If the MPC raise rates, then this prediction is nothing more than a gloomy alternative scenario that an appropriate policy tightening successfully avoided."

The chances of the MPC leaving rates at 0.5% for the next two years are precisely zero, so your prediction is worthless. You might as well predict a severe drought (provided it doesn't rain for the next two years). It's also interesting to note that last year's imminent inflation threat has been pushed almost three years into the future, a future which will be indefinitely postponed.

Had the MPC heeded your calls from last summer to raise interest rates, we would now be looking at a severe and prolonged recession. As it is, it looks like the UK will be coming out of recession in 2009 Q3 and possibly even Q2 - blink and you would have missed it! Once the recovery is firmly established, then will be the time to raise rates, reverse QE and cut back Government spending – and it's nothing to do with the electoral cycle either!

Young Mark

Alice Cook said...

Young Mark

WAKE UP! We are talking about the future here. How can anyone be confident about making a prediction? It is just my best guess. It is what I think is going to happen. Take it for what it is, and no more.