From The Ritz To The Rubble
Jan. 29th, 2006 09:52 am![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
peterbirksAs regular readers of this blog will know, I am a great admirer of Financial Times columnist Philip Coggan. His analysis is usually spot on. But even our Philip seems to get tied up in logical knots at times. In yesterday's piece he wrote an excellent column summarizing the various views of economic forecasters, but then blew it with the headline "Even the bears are divided between two camps".
One of the pieces of faulty logic brought to bear by the bulls (er, so to speak), is that the pessimists can't agree with each other on what is going to go wrong. Standing aside from the fact that the line "I know that there is going to be a disaster, but I can't tell how" is not a flawed line of thought (a penny rolling down a hill will eventually fall over to the left or to the right. I may not know in which direction it is going to fall, but I do know that its current position is unsustainable in the long run) Coggan also makes the error of putting the "pessimists" in the same camp as the "bears".
Referring to the "two bear camps" he says that:
one half believes inflation is the inevitable result ... the steady rise of gold is a sign, they believe, that investors are worried about inflation ... Eventually, the bears argue, high debt levels will overwhelm consumers. When it does, the Fed will allow a "helicopter drop" of money into the US economy. The resulting inflation will alleviate the debt problem but result in the collapse of the dollar".
I've cut out the bits on the "Greenspan Put" (a fascinating area to which I must return at one point) and I may disagree slightly on Coggan's interpretation of the inflation-theorists (of whom I am one) -- to my mind Coggan's interpretation is a bit Friedmanesque, whereas my view is that inflation can develop even without the helicopter drop of money. But the main area with which I disagree is that inflation-theorists are necessarily bears.
Although increased inflation has a short-term downside impact on equity levels, if you look at it logically, equities are one of your best places to park money when inflation gets going -- particularly if the company in which you invest has managed to borrow money at fixed rates over a reasonable time period and it makes stuff which is going up in price. In other words, I can be an inflation-theorist and a long-term equity bull at the same time.
I know that we are beginning to look like Southern Christian sects here, splitting into ever small camps, but the argument which Coggan imputes to me, that equities are overpriced because inflation is going to return, is not one that I am making. In fact, my observation that inflation is going to return is not "pessimistic" at all -- it's simply an economic interpretation to which I ascribe no value. The result will be a shift in wealth from savers to borrowers. That's what inflation does and my theory is that, when the distribution of wealth moves too far in favour of one sector of society (as in our long-term recent period of real positive interest rates) then things happen, somehow, to redress the balance.
Far from damaging equities, this inflationary shift (I've been saying that the year 2012 will see the big shift for about five years now, so I might as well stick to it) will eliminate a lot of personal debt (or at least ease it), will bring house prices back to a sustainable level (3.5 to 4 times average earnings in UK) and will stop comsumption falling into a black hole. All good news for equity investors, I would say.
One of the pieces of faulty logic brought to bear by the bulls (er, so to speak), is that the pessimists can't agree with each other on what is going to go wrong. Standing aside from the fact that the line "I know that there is going to be a disaster, but I can't tell how" is not a flawed line of thought (a penny rolling down a hill will eventually fall over to the left or to the right. I may not know in which direction it is going to fall, but I do know that its current position is unsustainable in the long run) Coggan also makes the error of putting the "pessimists" in the same camp as the "bears".
Referring to the "two bear camps" he says that:
one half believes inflation is the inevitable result ... the steady rise of gold is a sign, they believe, that investors are worried about inflation ... Eventually, the bears argue, high debt levels will overwhelm consumers. When it does, the Fed will allow a "helicopter drop" of money into the US economy. The resulting inflation will alleviate the debt problem but result in the collapse of the dollar".
I've cut out the bits on the "Greenspan Put" (a fascinating area to which I must return at one point) and I may disagree slightly on Coggan's interpretation of the inflation-theorists (of whom I am one) -- to my mind Coggan's interpretation is a bit Friedmanesque, whereas my view is that inflation can develop even without the helicopter drop of money. But the main area with which I disagree is that inflation-theorists are necessarily bears.
Although increased inflation has a short-term downside impact on equity levels, if you look at it logically, equities are one of your best places to park money when inflation gets going -- particularly if the company in which you invest has managed to borrow money at fixed rates over a reasonable time period and it makes stuff which is going up in price. In other words, I can be an inflation-theorist and a long-term equity bull at the same time.
I know that we are beginning to look like Southern Christian sects here, splitting into ever small camps, but the argument which Coggan imputes to me, that equities are overpriced because inflation is going to return, is not one that I am making. In fact, my observation that inflation is going to return is not "pessimistic" at all -- it's simply an economic interpretation to which I ascribe no value. The result will be a shift in wealth from savers to borrowers. That's what inflation does and my theory is that, when the distribution of wealth moves too far in favour of one sector of society (as in our long-term recent period of real positive interest rates) then things happen, somehow, to redress the balance.
Far from damaging equities, this inflationary shift (I've been saying that the year 2012 will see the big shift for about five years now, so I might as well stick to it) will eliminate a lot of personal debt (or at least ease it), will bring house prices back to a sustainable level (3.5 to 4 times average earnings in UK) and will stop comsumption falling into a black hole. All good news for equity investors, I would say.
