Jan. 28th, 2008

peterbirks: (Default)
There are many headlines that we in the financial world know that we will never see. One of them is "IMF urges fiscal relaxation".

Except that, well, fuck me, this morning we did.

This is on a par with Hitler saying in the late 1930s "Actually, the Jews aren't all that bad".

It would appear that the IMF is so convinced that changing the level of interest rates will not be enough to avoid a looming crisis, that it it is urging "countries that can afford it" to relax its fiscal policies. Well, actually, it's also calling on countries that can't afford to -- including the US.

The IMF supporting a fiscal stimulus package in the US, where for donkeys' years it has been calling for fiscal tightening to end the country's chronic budget deficit, is surely the end of civilization as we know it.

The worrying thing about this is that fiscal stimulus can have unintended consequences. You might avoid an impending nightmare scenario, but only by saving up trouble for later. In this case, the "trouble for later" is inflation.

I've long been convinced that inflation will re-emerge within a decade (in fact, within five years, since 2012 was my prediction in 2002 for the date that the numbers would start going up and would not be brought back down by interest rate increases) and if the developed and emerging world has to head into "prime up the global economy" mode to stop the mother of all recessions, then we are quite likely to see a situation not dissimilar to that seen in Ireland for more than 10 years. In that case, the money fed through to a property bubble, but at the moment we are in a property bubble. All the extra money might suport house prices, but it will also feed elsewhere -- particularly into the pockets of the emerging middle classes in China and India.

This will create both demand-led and supply-supporting inflation. In old laymen's terms, too much money, and too few goods. And it won't just be there. Already we are seeing softs increasing in price way beyond "official" inflation. Wheat, corn, etc. Add to that an inevitable increase in energy costs for the consumer and, well, eventually the wage restraint will crack.

PJ

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