The Bank of England and most consensus economists, including most right-of-centre monetarists, are stoking deflation fears. The MPC voted to print £50 billion more this month. Which is very convenient for Gordon Brown and Alastair Darling, it allows them to justify printing money, which they can then use to buy their own escalating government debts. Which is a little like eating your own leg to stop you starving.
The economic debate on this is confusing, the data is mixed and to some extent depends on your time frame. The drop in oil prices and other commodities post-crunch had a deflationary effect. Against this you have U.S. and U.K. government debt levels which are extraordinary. Terrifying. Gilt yields (interest rates) are being held down by the Bank of England printing billions of pounds to buy gilts from the Treasury and artificially hold up gilt prices.
The Bank of England’s own pension fund however is heavily invested in inflation protected securities – which is odd given their public stance is that deflation, not inflation is the threat. Consensus economists are sheep and we need not worry too much about their bleating, more surprisingly some right-wing monetarist economists, such as those on the IEA’s shadow monetary policy committee (who tend to work in the City for investment banks) are also believers in deflation. Guido’s theory is that the reason they have supported expanding the money supply so drastically is they panicked, remember all those articles in the Guardian and the FT about the “end of capitalism”and the end of investment banking as we know it? Their morale was low, they were afraid. Printing money and flooding the market with liquidity would be a short term fix that would shore up the banks and save their jobs. Hence all these right-wing economists became born again Keynesians and could be found all over the Square Mile screaming at the Bank of England to turn on the printing presses.
Well capitalism survives and thrives. Some of those economists are now wondering about the wisdom of printing all that money. Nigel Lawson’s biographer, Eamonn Butler of the Adam Smith Institute, changed his mind on quantitative easing a few months ago, the IEA’s shadow MPC is no longer unanimously in favour of quantitative easing.
Nassim Nicholas Taleb yesterday warned of the inflation threat, Cameron conceded the possibility of a British debt crisis. Guido thinks it highly unlikely Britain would ever default on it’s debt so long as it has a sovereign currency – we would just devalue and pay foreigners in devalued pounds. Though Britain could have, as Cameron said, foreign investors demanding higher risk premia, higher yields. That could see mortgage rates above 10% again – both here and in the U.S.
Warren Buffet yesterday was quoting John Maynard Keynes’ road map for political survival amid an economic disaster of just this sort: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens…. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
Protect yourself from the coming inflation. Like the Bank of England’s pension fund…