Saturday, April 25, 2009

Deflation? You're joking!

Newpaper headlines: we're in deflation for the first time since x years.

Yes, looking at RPI, which takes into account mortgage costs, which have plummeted since the Bank of England cut the rate to its lowest since the Bank started.

No, if you look at non-mortgage costs of living - another newspaper article says pensioners' experience of inflation is something over 12%.
I can't be bothered to find and link the MSM articles. In my view, Guido is right: journalists have become lazy, uncritical copytakers. Now have a look at Zeal's graph of the money supply, the immediate-demand form of which has doubled in 12 months in America.

I still think we're in a sort of re-run of the 70s. Cash will be forced out of accounts and into the market, where it will still lose value, but nothing like as badly as if left rotting in banks and building societies. The Great Theft is on its way.

If you follow Marc Faber, you'll know that he's currently suggesting holding half your wad as cash, since the bubble hasn't really burst yet; but other than that, he's thinking 10% gold and 40% in a combination of resource and emerging market stocks.

The world's average per capita income is $8k - $9k; as globalisation continues the levelling-out process, the East will never be as rich as we once were, but they'll be less poor. For us, on the other hand, this may be the last chance to put something away for our future.


Anonymous said...

What do you say to MISH? He defines deflation as a 'net contraction of money and credit', it is specifically not 'falling prices'.

By that token since credit is being destroyed, and I have read around the web that there may be another $1.5 -2 T of asset destruction to go, perhaps we are seeing something we thought impossible. The printing presses can't actually keep up with the destruction of credit?

hatfield girl said...

A deadly combination of a fall in employment and accelerated inflation is where we all are. It's not just pensioners, everyone is on fixed and falling incomes in real terms.

Anonymous said...

Hatfield girl: "A deadly combination of a fall in employment and accelerated inflation is where we all are."

If you have an increase in unemployment, that implies a reduction in demand, yes?

If there is less demand, how does a producer sustain increasing prices?

hatfield girl said...

It's the stagflationyness of it, 16.44.

Sackerson said...

Anon 10:03 - "they" will not let the holders of cash be the masters. The pound and the dollar will not be permitted to hold, much less increase, their purchasing power.

Anon 16:44 - globalization plus loss of our manufacturing base and hollowing-out of our mineral resources means we'll have to pay somebody else's price. And our wage rates will have to plummet before we can begin to compete. Meantime, China and others are acquiring the skills and the technical expertise that some theorists think will keep us Westerners effortlessly floating above them.

In short, HG is right - thanks for your comments, HG.

Wolfie said...

Added to this recipe for pain many employers are still insisting on pay freezes and cuts in the workforce. Complaining that real inflation is crippling doesn't get you anywhere, I was even quoted the "press hysteria" as justification for recent pay cuts by the head of Group Risk the other day. We are simply governed by the press now.

Anonymous said...

"The pound and the dollar will not be permitted to hold, much less increase, their purchasing power."

OK. Let me see if I can get a 'handle' on this. The UK government has just nationalised two small to medium domestic banks and one medium sized international bank. The first two were heavily into the domestic property market, their interest in that market is down by 30%, the third also a large domestic property lender, but also a fairly big international player - this bank has obligations a couple of times larger than the GDP of the UK.

The UK government has directly assumed the liabilities of these three, much of the debt of the third is denominated outside of the sterling zone and is now thanks to devaluation of sterling perhaps 20 -25 % more expensive to service.

We hear the refrain 'the government is printing' on the one hand, but on the other hand we hear the government itself whinging that the banks are not lending.

So, where is all that newly printed cash going?

What does the bank of England balance sheet look like?

Sackerson said...

Good questions, Anon, and I wish I knew. I'm a soldier trying to work out what's going on in HQ.

James Higham said...

I still think we're in a sort of re-run of the 70s.

Run with this a little further. I read yours, Wolfie's and Anon's comments above but still don't see how it is a re-run exactly.

Sackerson said...

Inflation and economic stagnation, followed (one hopes) by the arrival of somebody determined to save the country with a tough package of budgetary measures.