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I've just spotted something odd about the deflationist vs inflationist argument. Every time the recession looks like re-emerging and deflation returns as a threat, the more the inflationists (and I include myself as falling into this trap) shout
Key to the argument, of course, is the inflationists' argument that inflationary problems don't become gradually obvious when you have been cranking the printing presses like a lunatic. Instead they just appear like Nanny McPhee, standing in front of your desk, saying "I did knock". And key to THIS argument is the Buffett-praised book "When Money Dies" by Adam Fergusson, the 1975 book of the Weimar inflationary period, originally written in 1975 (when inflation in the UK nearly hit 30%, btw).
But here I am reminded of a John Laurie monologue in Dad's Army, where he talked of his friend Jethro on whom an old woman laid a death curse. "Did it come true?" asks Pike at the end of the tale?
"Aye, that it did. He died last year, aged 83", said Laurie.
Well, for the inflationists, it's a bit like that. If inflation kicks in badly in 2015, as a result of governments' actions to stave off deflation in 2008, 2009, 2010, 2011, 2012 and 2013, but you have seven years of modest inflation/ static prices in the mean time, well, that hardly strikes me as justification for the inflationists to scream "You see! We were right!". It's rather more a clear indication that deflation was indeed the major threat, and that it was only several years' sustained helicoptering that stopped the west entering a lost decade along thelines of Japan in the 1990s.
So, perhaps I should stop shouting about the inflationary threat. Interest rates have already been kept at 0.5% for 12 months longer than I thought they would, and it looks as if they might stay that way for at least six months more. Pricing pressures don't seem to be seeping through, partly, at least, because much of the extra money that's being pumped into the economy is being used to pay down debt. It's not being used to stimulate demand. And finally, of course, there's still spare capacity. That means that, for the moment, the extra money being pushed into the economy is functioning neither to prod supply-push or demand-pull inflation.
That doesn't mean that it won't do so eventually, but, well, that's a bit like dying at 83. How soon does a curst have to take effect for it still to be true?
Many are still claiming that this is a re-run of the Hayek vs Keynes arguments of the 1930s. I don't think it's anything of the kind -- not least because we are in a much more global economy now. In that sense, Keynesian arguments are not so much wrong, as simply an answer to a question that is not being asked. Average levels of debt,the way that money is spent, the way that the economy is put together, all mean that the Keynesian solution just wouldn't have the required effect, because money doesn't flow through the economy now in the way that it used to in the 1930s.
If all of the above is a reasonable scenario (renewed optimism, renewed money-pumping, renewed stability), it does not spell good news for the dollar. The euro has different problems (many of the banks are still bloody insolvent, for god's sake) and the only reason people have faith in much sovereign debt is, basically that, well, you have to believe in something.
Nice to see that I'm in the black on BP at last though.....
_________
"ah-HAH! But this means there will be even more Quantitative Easing aka Helicopter Money. Which means that the inflation will be all the more devastating when it arrives".
Key to the argument, of course, is the inflationists' argument that inflationary problems don't become gradually obvious when you have been cranking the printing presses like a lunatic. Instead they just appear like Nanny McPhee, standing in front of your desk, saying "I did knock". And key to THIS argument is the Buffett-praised book "When Money Dies" by Adam Fergusson, the 1975 book of the Weimar inflationary period, originally written in 1975 (when inflation in the UK nearly hit 30%, btw).
But here I am reminded of a John Laurie monologue in Dad's Army, where he talked of his friend Jethro on whom an old woman laid a death curse. "Did it come true?" asks Pike at the end of the tale?
"Aye, that it did. He died last year, aged 83", said Laurie.
Well, for the inflationists, it's a bit like that. If inflation kicks in badly in 2015, as a result of governments' actions to stave off deflation in 2008, 2009, 2010, 2011, 2012 and 2013, but you have seven years of modest inflation/ static prices in the mean time, well, that hardly strikes me as justification for the inflationists to scream "You see! We were right!". It's rather more a clear indication that deflation was indeed the major threat, and that it was only several years' sustained helicoptering that stopped the west entering a lost decade along thelines of Japan in the 1990s.
So, perhaps I should stop shouting about the inflationary threat. Interest rates have already been kept at 0.5% for 12 months longer than I thought they would, and it looks as if they might stay that way for at least six months more. Pricing pressures don't seem to be seeping through, partly, at least, because much of the extra money that's being pumped into the economy is being used to pay down debt. It's not being used to stimulate demand. And finally, of course, there's still spare capacity. That means that, for the moment, the extra money being pushed into the economy is functioning neither to prod supply-push or demand-pull inflation.
That doesn't mean that it won't do so eventually, but, well, that's a bit like dying at 83. How soon does a curst have to take effect for it still to be true?
Many are still claiming that this is a re-run of the Hayek vs Keynes arguments of the 1930s. I don't think it's anything of the kind -- not least because we are in a much more global economy now. In that sense, Keynesian arguments are not so much wrong, as simply an answer to a question that is not being asked. Average levels of debt,the way that money is spent, the way that the economy is put together, all mean that the Keynesian solution just wouldn't have the required effect, because money doesn't flow through the economy now in the way that it used to in the 1930s.
If all of the above is a reasonable scenario (renewed optimism, renewed money-pumping, renewed stability), it does not spell good news for the dollar. The euro has different problems (many of the banks are still bloody insolvent, for god's sake) and the only reason people have faith in much sovereign debt is, basically that, well, you have to believe in something.
Nice to see that I'm in the black on BP at last though.....
_________
