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Flationary times
Jan. 9th, 2010 08:02 pmI thought to myself; I'll just get this post up during the first half-hour of my first tournament (yep, playing some tourneys in the evenings this month), but then I got distracted by a Woodhouse post, and then a Dolton post (must say I likle the look of his new Canon Camera) and then a Chan post. Sigh.
Anyhoo, I was going to write about an interesting post from Roger Bootle here: http://www.deloitte.com/view/en_GB/uk/news/news-releases/press-release/05a43362fb806210VgnVCM200000bb42f00aRCRD.htm
Bootle basically argues that we should heap more money into the economy, on the grounds that
One wonders whether part of his argument is because he has done his bollocks, but it's hard to see how. As John Authers observes this morning in the FT, 2009 was a funny old year, in that the deflationists "won" the intellectual argument, but it was the inflationists who walked home with the money. Anyone who had backed standard deflationary investments in March would have been considerably poorer come December. Meanwhile the inflationary plays (Gold, index-linked bonds, certain equities) dis ridiculously well. A strange scenario when demand apparently remains depressed (people are actually paying down debt instead of spending everything that's coming in!) and people like Bootle are arguing for more QE because there is no evidence that the £200bn already thrown in has worked.
Part of the problem is that "we have not seen the like of this before". Authers pins the fundamental inflationists' argument -- that governments will have to inflate away the debt (while simultaneously denying even to themselves that that is what they are doing), but also points out that what has been happening so far doesn't seem to indicate any evidence of it happening, partly because there is such a huge amount of spare supply capacity. As I think I've written before, I feel that this "spare capacity" argument (one repeated this morning in the FT's Money Section by Merryn Somerset Webb) is a bit of a red herring. It's a standard Kenynesian argument that has already been disproved once (in the 1970s), so there's no reason why it shouldn't be disproved again. Inflation is not only caused by too much money chasing too few goods. Suppliers do not act in the rational way that Keynes predicted. They act in a way they think they can get away with. That may mean increasing prices even though Keynesian economics assumes that they will cut them.
Well, that's my line and I'm sticking to it.
Another bit of confusion arises in what you define as "inflation". While I am an inflationist, I think that there will be massive asset deflation. "Inflationists" are really "money inflationists". Other parts of the economy are just measured by money, but move up and down in relative value as well. The question about the massive asset deflation is not whether it will happen (that houses will not remain at the same price relative to average earnings is as near a certainty as I think I can find) but how it will be achieved. Will the price drop in absolute terms, or will it remain the same as the value of the measure (money) declines?
The former is far more painful (psychologically) to people than the latter.
Another interesting macroeconomic development in the UK is that the number of people who own their property outright has been increasing since about 2005. "Mortgage slaves" are disappearing as the average age of the homeowner increases. Clearly the highly visible perpetual remortgagers had hidden this interesting fact, annd I'm not sure of its implications (although I am sure that there are implications).
Oh well, second tournament is starting. bett go and do some thinking.
Anyhoo, I was going to write about an interesting post from Roger Bootle here: http://www.deloitte.com/view/en_GB/uk/news/news-releases/press-release/05a43362fb806210VgnVCM200000bb42f00aRCRD.htm
Bootle basically argues that we should heap more money into the economy, on the grounds that
there is still little evidence that the MPC’s policy of quantitative easing (QE) is having the desired effect on money and credit. At its last meeting, the Committee deemed the rate of broad money growth “disappointing.” That’s an understatement – the money multipliers have collapsed.
One wonders whether part of his argument is because he has done his bollocks, but it's hard to see how. As John Authers observes this morning in the FT, 2009 was a funny old year, in that the deflationists "won" the intellectual argument, but it was the inflationists who walked home with the money. Anyone who had backed standard deflationary investments in March would have been considerably poorer come December. Meanwhile the inflationary plays (Gold, index-linked bonds, certain equities) dis ridiculously well. A strange scenario when demand apparently remains depressed (people are actually paying down debt instead of spending everything that's coming in!) and people like Bootle are arguing for more QE because there is no evidence that the £200bn already thrown in has worked.
Part of the problem is that "we have not seen the like of this before". Authers pins the fundamental inflationists' argument -- that governments will have to inflate away the debt (while simultaneously denying even to themselves that that is what they are doing), but also points out that what has been happening so far doesn't seem to indicate any evidence of it happening, partly because there is such a huge amount of spare supply capacity. As I think I've written before, I feel that this "spare capacity" argument (one repeated this morning in the FT's Money Section by Merryn Somerset Webb) is a bit of a red herring. It's a standard Kenynesian argument that has already been disproved once (in the 1970s), so there's no reason why it shouldn't be disproved again. Inflation is not only caused by too much money chasing too few goods. Suppliers do not act in the rational way that Keynes predicted. They act in a way they think they can get away with. That may mean increasing prices even though Keynesian economics assumes that they will cut them.
Well, that's my line and I'm sticking to it.
Another bit of confusion arises in what you define as "inflation". While I am an inflationist, I think that there will be massive asset deflation. "Inflationists" are really "money inflationists". Other parts of the economy are just measured by money, but move up and down in relative value as well. The question about the massive asset deflation is not whether it will happen (that houses will not remain at the same price relative to average earnings is as near a certainty as I think I can find) but how it will be achieved. Will the price drop in absolute terms, or will it remain the same as the value of the measure (money) declines?
The former is far more painful (psychologically) to people than the latter.
Another interesting macroeconomic development in the UK is that the number of people who own their property outright has been increasing since about 2005. "Mortgage slaves" are disappearing as the average age of the homeowner increases. Clearly the highly visible perpetual remortgagers had hidden this interesting fact, annd I'm not sure of its implications (although I am sure that there are implications).
Oh well, second tournament is starting. bett go and do some thinking.
