Sunday, February 22, 2009

Inflation will be back.

I find the current orthodoxy of financial commentators impossible to swallow. The rush to spend more and more billions (disguised by the reassuring words 'financial stimulus'). The decision to start printing more of the stuff (disguised by the meaningless words 'quantitative easing'). The dropping of interest rates towards zero. These things all seem crazy to me, a recipe for inflation. And then we have the collapse in Sterling which is bound to push up the cost of imports - and stocks can only be run down so far. Even more pressure on inflation. I read that prices are falling, and that the RPI is down close to zero. But last month's Consumer Price Index dropped only 0.1% - to 3.0%. This should have been seen as a red flashing warning light - but for some reason it wasn't. The UK is in a mess because our banks lent to much, (often without giving much thought to the capacity of the borrower to repay), and the British Government, despite having already borrowed too much, has just has gone on a spending and borrowing spree, the like of which we have never seen before. And yet all these financial experts dismiss inflation as not being a threat. Except Liam Halligan in today's Sunday Telegraph. Well Liam might be 'bonkers' - 'bonkers' like a man who has his opened his eyes to see, rather than his ears to hear what those around him are saying..

Anyway, my view that inflation will soon be back to stalk the land has caused me to take an important personal decision today. Last September, I put a 100 acre block of farmland on the market. But when the banks suddenly hit the wall, I decided to rent it out over the winter instead, with the intention of selling it in the Spring when the panic was over. Some hope of that. Today, I've decided I'm not going to sell it at all. When inflation comes to town, the best investment is farmland (or gold I suppose). In two year's time, I see a new Government fighting to control the evils of inflation, with interest rates being forced up to cripplingly high levels again. I see Gordon Brown's legacy as a crashed landscape in need of massive reconstruction. OK, so perhaps I'm wrong - 'bonkers' even, but I'm taking precautions, starting today.


Chas said...

I couldn't agree more. I am 46 years old - about as young as anyone who remembers inflation. Inflation is financial cancer. It is very difficult to control, let alone eradicate, and it eats away at money and savings in the most pernicious way. Brown's legacy to the UK economy will be utter ruin.

Glyn Davies said...

Chas - And its the vulnerable who suffer most.

Sweet and Tender Hooligan said...

Infation, is that a new economic buzz word?


The Half-Blood Welshman said...

Glyn, I would have said that both you and Mr. Halligan are merely being prescient, and certainly you're neither of you in any way "bonkers." Land, especially land that brings in a rental income, looks like the way to go at the moment, with inflation already high and the Bank of England's actions increasingly divorced form the realities of the situation.

Correspondent from "DC" said...

Imho, ur spot on Glyn. Brown has set the UK on course for "Doom, I tell ya". GB is acting like a gambler around a table stacked high with UK chips with the likes of Dan Clifton (“Dynamite Dick”), George Curry (“Wild Bunch”), “Johnny Behind the Deuce”, Jim Miller (“Killin’ Jim”), and Nathaniel Reed (“Texas Jack”).

But Wales is of a size where it can actually, in the words of Queen, “Break Free”. But we have two front line ministers who have the functional equivalent of cotton wool stuffed down their ears.

As many in Wales are now beginning to appreciate, Wales needs to convert world-class Welsh intellectual property into jobs and wealth creation for the nation, to finally take substantive steps to harness the wealth and job creation powers currently going to waste.

Welsh intellectual property holds the key to a prosperous Wales. For some strange reason, the likely lads currently running the WAG are unwilling to turn the key and release the huge job and wealth creating power of Welsh intellectual property.

I have gone out of my way to be available to chat with the First Minister next month in the USA at a Wales promotion event in Washington, DC (and I believe the FM is opening the BioWales 2009 event so he could speak to me in Wales), but I doubt the First Minister will bother to actually talk to one of Wales's most knowledgeable experts (probably the only one with an IP law firm close to the US Patent/Trademark Office, "USPTO") on intellectual property in the USA.

Welsh intellectual property is the key, and the largest most profitable market for intellectual property remains the United States of America.

Glyn Davies said...

S T H - Thanks - Will correct- Infation sounds extremely unpleasant.

Half Blood - And today's Telegraph is reporting even more eye-watering 'investment' by Gordon Brown. Its frightening. As far as land is concerned, I was thinking more of capital appreciation rather than rental. Ironically, it was inflation in the seventies that established my farming business.

Corr from DC - If you happen to read this blog Rhodri, you could do a lot worse than meet Dr Christopher, and listen to his ideas.

ROMAN JONES Esq. said...

The Government is increasingly worried about deflation. Sounds like a good thing that High Street prices keep getting cheaper, but what it in fact means is that the British public stop buying things, waiting for cheaper prices next month. This causes a massive drop in sales for all firms, exacerbating the recession. The Government is therefore planning quantitive easing (printed more money and releasing it into the economy via swapping it for old debts). This will make the pound effectively worth less because there are more of them floating about. This will fuel inflation – hopefully offsetting the deflation mentionned earlier. However, it is a VERY delicate balancing act, and Gordon Brown track record of success so far leaves a lot to be desired. If we thought Gordon Brown had a torch to steer us through this mess, the battery appears to be flat. It is not inconceivable that the Government’s balancing act will fail, billions of your pounds will be lost, we will have to go cap in hand to the International Monetary Fund for a bail out (assuming the IMF has any money left) and the inflation in Britain will echo that of Zimbabwe! Joining the euro, sometimes mooted by the more misguided, would do no good. We would be locked into current rates forever, with no independence of action, and the eurozone has its own problems. Many of its member states are in recession and losing their credit worthiness. Two drowning men do not make a swimmer., we would be shackled to a corpse!

What we need to do is rather than the Government create a Toxic Bank of bad debts from the High Street banks, they should create a new nationalised ‘UK Building Society’ (UKBS) out of the good assets of the banks it has taken over (Lloyds/HBOS/RBS/NRock/B&B) and maybe even Barclays soon. All savers and people with mortgages should be transferred to this UKBS and the shriveled husks of the old banks be allowed to collapse with their toxic debt. This would safeguard people's assets 100%. The money the Government is currently pouring in to prop up the banks could then be used as an umbrella capital for this UKBS, all owned 100% by the taxpayer and all profits to the taxpayer. The more stable institutions such as HSBC, Nationwide, Co-Op etc can stay independent if they so wished but if they became under threat in the future - then would HAVE to join UKBS or be allowed to go bust. No more taxpayer handouts to the greedy bankers! Once the economy begins to pick up, in 2012 maybe (?) then this massive UKBS could be privatized for our benefit.

I would also propose government low interest loans to struggling but sound companies, and a cut in tax for middle earners. Financed by government economies and cuts in waste. We can save our country, we can rebuild our economy but it is going involve months of blood, toils, tears and sweat!

Correspondent from 'DC' said...

Thank you Glyn; it is a puzzle to me that the First Minister hasn't asked his staff to contact me. It is just so silly. Especially silly because the First Minister actually gave a speech to Welsh expats in the USA asking us not to forget Wales.

Draig said...

Well Glyn, the evidence in your newest post contradicts this post. If a factory in your area has cut working hours, then in effect that's wage deflation. People are taking home less wages to save the company costs.

It's pretty rampant across manufacturing now and will probably start to percolate into the public sector too...

Glyn Davies said...

Draig - It is indeed in effect lower salaries - but this doesn't feed into deflation. I don't suppose the cost of CT products has fallen. They will probably be going up if there are many imported component parts.

Savonarola said...

There is little doubt that demand will remain weak. Our economy will take ten years to recover because it requires structural change.

Demand for plasma screens and discretionery items will fall. Food prices will rise so will oil and many other essential items.

The pace and quantum of 'money printing' will be greater than the slowdown in demand. Inflation ensues.

Govt will not be able to sell its debt so interest rates will rise.

US/UK Govt have only one option to repay debts - inflate. In 60's/70's good money lent to US/UK Govt was repaid with corrupted currency. The savers and prudent always pay for the folly of Govts and the feckless.

I do not have farmland. My insurance is gold bullion and gold mining shares. If I am wrong I do not mind having taken out insurance. So far my policy has paid very good bonus.

council_worker said...

I hope you are wrong Glyn, but suspect you are right.

Just a pity the councillors just voted only 2.9% increase - now we really do have cuts to make!

Draig said...

If people really want to see where we are going, just take a look at Japan. Japan tried all these stimulus tricks in the 1990s, to little avail.

Governments are busy printing money, banks will hoard it, and people will use whatever they get to pay down debt, rather than spending it. This is a deflationary depression, and no-where will be exempt.

There is so much debt out there, that it far outpaces the current expansion in money supply.