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Inferlashun
Oct. 1st, 2007 12:02 pmLong-time followers of the Birks macro-economic model will know that I have been predicting the return of inflation in the UK and world economies, probably kicking in from 2012 on. My own justifications for this were relatively domestic; the UK has too many young people in too much debt and too many old people with too much in savings. This inequitable distribution will not be allowed to last when the young people start to take the reins of power. However, the UK doesn't actually "steal" the money. But increasing inflation is one way to wipe out young people's debts (which are gradually becoming middle-aged people's debts as this group gets older and more powerful) and to devalue old people's savings. Since many of those savings are tied up in property, a long period of static house prices, amid rising inflation, serves to transfer wealth from old to young without so much as a shot being fired.
We are just about heading into a period where a significant proportion of the population do not physically remember living in a world of high inflation. I mean, already no-one under the age of 50 or so can remember the 30%-plus years of the mid 1970s. But those in power may soon be unable to remember years when inflation was above 10%. It's a bit difficult to understand the reality of a high-inflation society if you haven't lived it.
This sweet image of domesticity is not all that matters, though. Politicians like to think that they influence things, but they don't really. I'm enjoying reading The Black Swan, and Taleb covers errors of causation and narrative fallacies with concise glee. But low inflation can be traced back to a couple of causes -- the first was the Internet, which increased productivity phenomenally; and the second was China, which exported deflation for a decade.
We are coming to the end of these beneficial effects, which followed on from each other in such a fashion as to create a seamless "golden age" of full employment and low price rises.
In China, personnel costs are rising, the yuan is likely to be revalued, and commodity prices are forcing up the prices of the produced goods. With pork prices doubling in a year, workers will soon be demanding more money. With the manufacturers also seeing the price of raw materials going up, it won't be long before those cheap clothes in Primark aren't so cheap any more. In 2006, consumer prices in China rose 1.5%. By March, the year-on-year increase was 3.3%. By August, the coresponding figure was 6.5%. Food prices are up nearly 20% year on year and meat prices are up by 50% over the same period. Labour costs are rising too.
The impact of this will first be felt in Japan (a country that could actually do with some rising prices), but it will eventually spread to the west. And that will impact the retail price index in the UK. That could be the first nail in the coffin of our low inflation society.
I'm not alone in thinking this. It was nice to hear Alan Greenspan tell the BBC that "inflation tranquility" was set to end. Although he couched it in understated terms (remember his "irrational exuberance" line ... a couple of years ahead of time) his view was explicit. What we have experienced for nearly 20 years now is a result of little more than luck, of pure good fortune. Unfortunately, you will not find a single politician who will admit that, because politicians are convinced that they make a difference in the macro-economic world. The defeat of inflation (rather than its suppression, which is what it should be termed) is seen as the result of sterling political will, rather than being in the right place at the right time.
That blindness to the real causation will lead to an equal blindness when it comes to fighting inflation's return, because governments will think that "what we did last time" will have an effect, "because it worked then". Of course, "what we did last time" had nothing to do with it.
So, what's the way out for the man with savings? Once again, a lot of it is timing. For a few years, the "mattress fund" could be the right move. However, after equities have taken a bashing because of rising interest rates, equities become the best investment, because they produce real stuff of real value. Ultimately, the price of the share (all other things being equal) stays the same in real terms, which means that the nominal value goes up in line with inflation.
The same goes for property, except that property is currently overpriced, so that's not an option.
Of course, it's not a cheerful thought, looking forward to an old age where your savings could well be wiped out in the same way that a generation of old Russians were bankrupted under the post-Gorbachev Clownocracy. But at least forewarned is forearmed.
++++++++
I think that I've played some of my best poker since Friday. It's not as if I have been overly lucky (I can think of several hands that 'went wrong' but where I'm sure that my play was right), and, despite the Wednesday $430 fall, I crawled to a small profit for September. If I can maintain the focus that I have brought to my last 8 or 9 sessions, I'm confident heading into October.
We are just about heading into a period where a significant proportion of the population do not physically remember living in a world of high inflation. I mean, already no-one under the age of 50 or so can remember the 30%-plus years of the mid 1970s. But those in power may soon be unable to remember years when inflation was above 10%. It's a bit difficult to understand the reality of a high-inflation society if you haven't lived it.
This sweet image of domesticity is not all that matters, though. Politicians like to think that they influence things, but they don't really. I'm enjoying reading The Black Swan, and Taleb covers errors of causation and narrative fallacies with concise glee. But low inflation can be traced back to a couple of causes -- the first was the Internet, which increased productivity phenomenally; and the second was China, which exported deflation for a decade.
We are coming to the end of these beneficial effects, which followed on from each other in such a fashion as to create a seamless "golden age" of full employment and low price rises.
In China, personnel costs are rising, the yuan is likely to be revalued, and commodity prices are forcing up the prices of the produced goods. With pork prices doubling in a year, workers will soon be demanding more money. With the manufacturers also seeing the price of raw materials going up, it won't be long before those cheap clothes in Primark aren't so cheap any more. In 2006, consumer prices in China rose 1.5%. By March, the year-on-year increase was 3.3%. By August, the coresponding figure was 6.5%. Food prices are up nearly 20% year on year and meat prices are up by 50% over the same period. Labour costs are rising too.
The impact of this will first be felt in Japan (a country that could actually do with some rising prices), but it will eventually spread to the west. And that will impact the retail price index in the UK. That could be the first nail in the coffin of our low inflation society.
I'm not alone in thinking this. It was nice to hear Alan Greenspan tell the BBC that "inflation tranquility" was set to end. Although he couched it in understated terms (remember his "irrational exuberance" line ... a couple of years ahead of time) his view was explicit. What we have experienced for nearly 20 years now is a result of little more than luck, of pure good fortune. Unfortunately, you will not find a single politician who will admit that, because politicians are convinced that they make a difference in the macro-economic world. The defeat of inflation (rather than its suppression, which is what it should be termed) is seen as the result of sterling political will, rather than being in the right place at the right time.
That blindness to the real causation will lead to an equal blindness when it comes to fighting inflation's return, because governments will think that "what we did last time" will have an effect, "because it worked then". Of course, "what we did last time" had nothing to do with it.
So, what's the way out for the man with savings? Once again, a lot of it is timing. For a few years, the "mattress fund" could be the right move. However, after equities have taken a bashing because of rising interest rates, equities become the best investment, because they produce real stuff of real value. Ultimately, the price of the share (all other things being equal) stays the same in real terms, which means that the nominal value goes up in line with inflation.
The same goes for property, except that property is currently overpriced, so that's not an option.
Of course, it's not a cheerful thought, looking forward to an old age where your savings could well be wiped out in the same way that a generation of old Russians were bankrupted under the post-Gorbachev Clownocracy. But at least forewarned is forearmed.
++++++++
I think that I've played some of my best poker since Friday. It's not as if I have been overly lucky (I can think of several hands that 'went wrong' but where I'm sure that my play was right), and, despite the Wednesday $430 fall, I crawled to a small profit for September. If I can maintain the focus that I have brought to my last 8 or 9 sessions, I'm confident heading into October.
