And the phone didn't ring

[peterbirks]

I informed them at work that I might have to take an unscheduled long-term leave of absence. I turned on the mobile phone (a rare occurrence these days) and headed off to the gym.

But it was not to be. Once again I have not been picked for the Lions' tour. I knew that I was a bit of a long shot, but there was still that small disappointment when the text message failed to arrive, that feeling of once again having just missed the boat. Perhaps next time, although I accept that once you are in your 50s you are little bit over-the-top for scrum-half.

---

For some years I have been predicting the return of inflation around about 2012, but I am now beginning to worry that I might be a little premature. And in the world of finance it isn't just a matter of being right — you have to be right at the right time.

My thought processes are somewhat radical and certainly do not follow the lines of Philip Coggan in the FT. My premise is basically that too many people who will become decision-makers are being saddled with high levels of debt. In the old days the inflation fairy magicked this debt away. But now the debt is real, and has to be paid off with real money. For the moment, those in power are not saddled with a problem. Like me, they went to University when you got things called grants, and you only paid tuition fees if you were American and had rich parents. Our current leaders probably bought their first house about 25 years ago and thus benefited from the massive boom in house prices between 1982 and 1988, as well as the recent boom between 1996 and 2003. For them everything is gravy, and low inflation is good.

But fast-forward 10 years (yes, I now this takes us to 2015 -- that's why I said that I was worried that my prediction of 2012 might be a bit premature). The decision-makers now will be saddled with debt that has not been paid off. Although they are unlikely to make moves that increase the level of inflation, I suspect that there will not be the political or economic will to take the steps needed to stop it.

There is another reason. If we carry on at the present rate, the banks will be owed too much money. When you get a situation where a small minority (banks and their shareholders) benefit from a situation (i.e. low inflation) but the large majority (those with credit card debts and large mortgages) do not, then the money will inevitably be shifted from point A to point B in order to keep the economy ticking over. The best way to do this is to inflate away the debt.

This would appear to make index-linked gilts a good investment, despite the fact that they have performed well over the past couple of years. I have also advised anyone in their twenties or early thirties who will listen that they should take out a 30-year fixed mortgage at about 6%. For a small sacrifice in income now, you would basically be taking a no-lose position for your later years.

Comments

OMG I've done the wrong thing!

[miserable-git.livejournal.com]

On no, I've followed the wrong strategy! I've used the low interest rates from low inflation to reduce my debt levels. I haven't moved house for 14+ years now. I'm going to have zero debt in 2015! Does this mean I have to look around for ways to leverage myself into a high debt position just ahead of this?

Re: OMG I've done the wrong thing!

[peterbirks.livejournal.com]

Panic not JG, I have zero debt as well. Note that I am talking about people in their twenties and early thirties, not us! For the past few years and the next few, real interest rates are positive, so having as little debt as possible is the best thing to do. But, come the time when you can see inflation taking off and making net real interest rates negative, obviously it is in your interest to be in debt! This would be a good time to trade up to that bigger house. Now, when I said it was a good idea to take out a fixed-interest long-term loan, my point was that for people of a certain age, this was a bet with a very low downside (if interest rates and inflation stay low for the vast majority of the life of the loan, you lose very little) whereas the upside is enormous (if inflation and interest rates go up to 14% or thereabouts, you are quids in within three or four years).

The problem come 2015 will be for we savers and for those on fixed incomes. The tirck, of course, is to have assets which are inflation proof. IL gilts are one possibility, while equities are a good hedge in the long run (although those who remember 1974 will know that it can be a bumpy ride!). The last superb hedge is housing, and I think that by 2015 we might just be reaching the nadir of the inevitable housing slump. Gear up!

Pete

Re: OMG I've done the wrong thing!

[miserable-git.livejournal.com]

I'm not that fussed, if things were looking like that, I'd be able to sort out a 15 year fixed on a spare property. I already have one as a flexible pension asset.
It was an interesting point though and I wish some of those in power would occasionally think outside of the box at times.
The main downer I have with those in power at the moment is that they seem to have little grasp of the reality of the lives of the majority of us folk out here.

[(Anonymous)]

How the hell do you add a comment without going through the rigmarole of setting up a Live Journal of your own. Password can't be a real word? What fresh hell is this?

But on the subject of inflation, I think you are actually pessimistic in thinking it'll stay away until 2012 - I'd expect it to be creeping up before then as a consequence of the political cycle. Assuming we get the anticipated Labour majority of 50-80, the following election will be 2009/10 and I'd expect things to move in the parliament that followed.

It's down to politicians et al trying to solve the previous problem. Brown & Blair whinge about boom and bust where we saw a succession of attempts to reduce unemployment, inflation or balance of payments deficits which inevitably caused one of the other three to shoot up. It's Brown's achievement to have kept all 3 down (well kept 2 down and stopped stressing about BoP deificts). Just as it was Thatcher and Howe's achievement to screw up all 3 targets in 1979-83, albeit by chasing that wonderful M0/M3 money supply chimaera.

I don't expect this Goldilocks scenario of relentless growth to last forever and when we do start to have growth turn down and unemployment creep up, I think the fears of inflation as a problem will have gone. Those who suffered (fixed income pensioners etc) will be mainly dead or doddery. When was inflation last in double figures? So steps will be taken that will attempt reflation and risk inflation, probably in the latter days of the next parliament, combined with a need to get Brown a win in 2009.

I'm a big fan. I'll still have chunky mortgages into the 2010's so a visit from the inflation fairy would be hugely welcomed.

Geoff C

What fresh hell is this?

[peterbirks.livejournal.com]

It's actually easy to post as "anonymous" (as you managed). You just put "From Geoff C" at the top of the message (or bottom).

I've put my first month's blogs together in hard copy form as a GH. The first plog? So people can then e-mail a response to that and I can recreate the lettercolumn. After that, it all gets very confusing.

Re: What fresh hell is this?

[jellymillion.livejournal.com]

I'm hoping to be debt-free later this year, when (if) we sell the flat. SO far we've had offers but they've fallen short of our asking price. It feels a bit odd to be telling someone to take their half a million quid and sling their hook though. I'm taking it as another confirmation that middle age arrived a while back, but being middle-aged, it's taken until recently for me to realise. At this rate I'll never realise I'm actually old.

Having benefited (eventually) from the inflation-induced real-term debt reduction of the 80's, I'd certainly be prepared to take on some borrowing if inflation got anywhere near double figures again (and looked likely to stay there for a while).

Mike