The gathering storm

Chuck Unsworth

Starting from now and continuing for the next year, inflation will roar ahead. There's every chance that the economy will simply stagnate and atrophy. Those greedy bankers have nothing to do with this. Why do German and French bankers seem to have such beneficial and galvanising effects on their national economies? British Bankers?

Victor Southern

It is difficult to see why this should be a surprise. Our currency is a very low ebb and consequently imported goods cost more. Those include fuel or all types, many foodstuffs and clothing.

How could we expect otherwise? Printing money has always led to inflation and we have not even seen the tip of that yet.

RMH

The only words to describe the "threat" of deflation are :

1) bollocks
2) lies
3) spin
4) brownies

toco

Brown is an utter catastrophe who should have stuck with student politics and never been allowed to play with grown-ups' toys-allowing him to 'fiddle' with the Nation's finances was like putting a roaring drunk in a high performance sports car.

Moraymint

For me, the real issue here is the complete and utter failure of the UK's constitutional and democratic processes.

How can it be that we still face many months of being "governed" (shafted) by a group of political gangsters and shysters that have done more damage to this country in a decade than any external threat ever visited upon us?

The problem is that the damage is latent.

There will be a great and terrible unfolding of Gordon Brown's unholy economic legacy over the coming years. Most folk remain blissfully unaware of the pent up catastrophe that the Labour Party will hand over to the largely clueless Tories in the spring of next year.

All this seems fitting on a day when we learn that the UK has slipped further down the league of the world's most corrupt countries, thanks mainly to the venality of our political class.

How did it get to this? I suppose we only have ourselves to blame; or am I being too harsh on the ordinary bloke here? Is it the case that our society is fractured?

Perhaps we now have a political class (mafia) and all its hangers on ... and the rest of us dolts being taken for the mother of all rides.

Do we have to put up with this? Or can we withdraw our consent to be governed by an increasingly corrupt few?

Tankus

First time I've been abroad and not bothered with anything in duty free due to the price .(Greece)

Gone are the cheap weeks in the med ...

Boudicca

Printing money ALWAYS leads to inflation. Gordon Brown knew that. He was probably hoping it wouldn't start kicking off until post-election, when, if the British people were daft enough to elect him, he could use it to drive down the value of the massive debt he has saddled us with.

As ever with him, everything he does goes wrong and with catastrophic consequences for the people he claims to want to help: the poor and those on fixed incomes like pensioners. The man is evil.

Ken

While the lines below may not be minimally acceptable in terms of what passes for proper discourse on this blog, the confirmation of what others have for months been saying -- QE=hyperinflation -- prompts me to wonder if an ill-trained firing squad might be matched up with Brown in a suitable central location such as the Tower pdq?

There are times when the national good just cries out for summary despatch.

General Zod

Every time I pay for petrol or a tube ticket or school fees, I worry about deflation, or rather I wish I hqd deflation to worry about.

Hysteria

Moraymint - good post again mate. The issue for me now is "what to do" ? We hear from many quarters (including here in CH) what the problem is perceived to be, but where is the bloody solution?

The tories are as you say largely clueless (or at least, do a fine impersonation of this), and we are left with this bunch of incompetents.

As we have dicussed elsewhere, we don't "do" revolution here (being far too polite) and seem content as a population to just accept the status quo while watching Strictly, the X Factor or whatever else passes for mass entertainment these days.

Where is the leader(s) who can articulate the solution and have the will to carry it through - including the inevitable decline in living standards and potential for unemployment driven unrest?

Cam? he talks the talk of small government but will he walk the walk? The BNP ? interesting spoiling group but not really serious (and of course are extreme left of centre) UKIP? Single issue party - never a good idea.......

I just don't see from where the solution will come.....

Rush-is-Right

Tankus; "Gone are the cheap weeks in the med" unless you leave the Eurozone. Try (Turkish) North Cyprus. Good value, good weather, friendly locals, and dirt cheap!

alex popplewell

at a time when credit is contracting and the bank of england is properly acting as the lender of last resort(though some signs of life in bond and cp markets for larger co's suggest there may be some small hope that we are at the end of the beginning) it is disappointing to see so much economic illiteracy being displayed.the only inflation in the system is coming from government itself.enough to warrant catcalls at gordon but not enough to head off deflationary impetus in the real economy.try getting a loan as a small business and see if there is excess money in the system.profits and cashflow in manufacturing and service businesses are being protected by pay cuts,lay-offs and slashing both current expenditure-marketing budgets-and capital projects.this is not inflationary.Politicians screaming for pay restarint at banks are providing air cover for the fact that banks are being allowed to profiteer until they they have made enough to write all the nasties off their balance sheets and start to compete for market share again.then qe can be withdrawn.inflation IS always a monetary phenomenon,but look at the private and publc sector numbers together before rushing to judge that the BoE is being excessive.

Chris lancashire

Moraymint: I agree with most of what you say, Brown's legacy will last for years and will require a great deal of hard work to put right. However, just how can you get rid of a feckless, destructive but legally elected government? However bad they are there is no constitutional mechanism to make them go.

Pete Clark

Hahahaha! Take a thieving Scottish socialist ('no names mentioned for legal reasons') then give him the power to print as much money as he wants! Then worry about 'deflation'! Hahahahaha! Suckers!

Ellen

The only commentator to have spent much time on the dangers of QE is Liam Halligan. Read almost any one of his pieces and he points up the folly. Sadly, he's just a Cassandra, no one will listen:

http://www.telegraph.co.uk/finance/comment/liamhalligan/

greenslime3

The ‘surprise’ CPI for October was well predicted and forecast (I believe the consensus was 1.4% up from 1.1% and it actually came in at 1.5%).

The oil price peaked in the summer of 2008 and fell precipitously during 4Q 2008. Sep 09 oil prices in sterling were down about 25% yoy but a fast falling base effect meant that October oil prices were UP about 20% yoy. The author also mentions (on top of energy prices) transport (which is oil price restated) and duty increases, neither of which are more than one-off or driven by intrinsic underlying economic factors.

Meanwhile core inflation (excluding energy, food, tobacco and alcohol) has remained absolutely flat at 1.6% (range: 1.1-2.2%) for the last three years – even though sterling has lost almost a quarter of its trade weighted value, interest rates are as close to zero as they can go and QE ‘money printing’ equivalent to 13% of GDP has been created. Given the inflationary pressures those events would normally imply, to say that “the deflation threat… has not transpired” is surely testament to the effectiveness of the policy response, rather than an argument to suggest the threat was never there. The danger with this sort of argument is that it demands an end to economic support before the underlying economy is able to stand on its own feet.

The point about salaries not keeping up with near-term currency, taxation and energy cost pressures does really answer the author’s own question. Once the basing effects drop away, what will we be left with? A very deflationary outlook.

Yes, the US has dropped QE (as in specifically targeting broad money growth through buying long-dated Treasuries) though it does still engage in the riskier exercise of massively supporting the RMBS market (the US government has bought more MBS in the last year than China owns in Treasuries). However, broad money supply is now only 2-3% higher than it was a year ago in the UK but also in the US and even the Eurozone. Where would it be in the UK if it hadn’t have been for QE, or even the US for that matter (negative broad money supply is almost inevitably going to be deflationary)? The author needs to think about the dog that didn’t bark in the night rather than the visible evidence.

More subtlely, the Bank’s policy is not to “fund the government through printing money”. The government will fund itself through borrowing at the short-end from the same banking system that is constricting credit supply to the private sector and importantly, to a similar degree. What the Bank is left trying to orchestrate is a net increase in broad money, just like we’d have if the banks were lending as normal. QE is not feeding through to the real economy as hoped however, and so has gone off the boil. Some alternative strategy/policy is going to be needed but there is nothing in the economics theory playbook.

Our best bet is that both the Fed and the BoE next target bank reserves, probably by cutting interest paid. Bank reserves are dead money, built up when the central bank buys short-dated T-Bills from the banks (usually in order to encourage banks to lend and drive down funding rates to the Fed’s target). Because the banks are repairing their balance sheets, such risk-free assets (bank reserves) are available to be switched into other risk-free assets (longer-dated Treasuries say) but unlike normal times, they are not available to be turned into risk assets (like new loans). Making it less attractive to hold such idle reserves will facilitate bank lending to the public sector (be it direct, short-dated Treasuries or longer-duration floating rate paper). The big question is: will the market see this as an ‘exit strategy’ and therefore as somehow a form of monetary tightening? This is a real perception/confidence risk.

Olaf

Surprize indeed. I'm not an economist, nor do I work in finance. I don't even work in the finance section of the company or have O level accounts. I still knew this was going to happen and I know it will get a lot worse.

If I, a mere pleb, can figure this out why can't the great and the good?
Or they did know but don't care or even worse, planned it.

Tiberius

Alex P and Greenslime3: thank you for those well argued posts. From what I am experiencing, and reading widely on, I fall on your side of this argument.

oldtimer

The only question in my mind is this - why has it (inflation) taken so long to show up in the official data? It has been obvious both to my wife and myself that inflation has been hitting our every day spending for most of this year. The only beneficiaries have been those on tracker mortgages, the government (funding itself at 0.5% after foreign money did a runner last year) and the banks taking their turn on the QE process. The rest of us have been screwed.

greenslime3 says above: "Meanwhile core inflation (excluding energy, food, tobacco and alcohol) has remained absolutely flat at 1.6% (range: 1.1-2.2%) for the last three years...". My question to greenslime3 is this: how can inflation be considered "core" if it excludes energy, food, tobacco and alcohol?

Mark Bathgate

Greenslime - a few points:-

I would be wary of mistaking a relative price shift for an aggregate deflation shock - wages decline while import prices soar, netting out at reasonable inflation. This happens a lot in Emerging market shocks - given the huge debt position of the UK across households/government/banks this model fits more closely.

UK inflation has been temporarily distorted lower by the base effects of the oil price slump and the VAT cut - it will move quickly higher now. Ultimately there is an important message in the fact that the UK has a much higher inflation rate than our peers despite a deeper and longer recession.

The problem with funding government debt very short term is that it is still there when the recession ends. When interest rates normalise, the cost of debt service soars. Various Latin American countries have tried this approach (and the US is currently) and it has tended not to be a success.

I agree the problem of the banks is key - as long as the banking crisis remains unresolved credit will remain expensive and scarce. Fixing the banks - rather than printing money to expand government - would seem to be the better solution though. Sweden, Finland and Norway in the early 1990s showed how this can be done.