INFLATING A RECOVERY

I've spoken about inflating your way out of debt before but I was a Charteris Treasury Porfolio Managers seminar yesterday and a few things stood out for me from its Chief Exec and Financial Risks Today contributor Ian Williams:

1) Globally we are in boom time. Ok, the barely breathing corpses of the UK, US and parts of Europe are not but essentially things are looking good elsewhere.

Of course there has been a transfer of wealth which began when factories starting shifting to China and India, but the big question for the UK and others is what do we do to keep up with the burgeoning economies of the BRICS?

2) The US is in trouble, serious trouble. Yeah I know, what's new? But, think about it, there is around $2bn (£1.22bn) floating out there because of QE1&2 and a possible third on the way. This in itself is feeding inflation through the commodities pricing but what happens if the US goes into recovery?

What does it do about the money? It can't easily take billions out of the economy without risking a recovery but at the same time, that unprecedented amount of money sloshing around the system will inevitably feed...yep inflation.

So is the States damned if it does, damned if it doesn't?

3) Oh, joy. According to Williams, we are yet to be at the top of the gold cycle.

We've still got someway to go - 2020 to be precise if the modelling is accurate.

INTEREST-ING

Yesterday the head of the ECB, Jean-Claude Trichet, signalled that interest rates in the Eurozone will rise again to stem inflationary pressures.

In the UK, the interest rate is still at its record low as the country fights against a possible downturn coupled with the austerity programme.

So who has the right policy?

Clearly, in the UK, there is a high degree of inflating our debt away while cutting the deficit but what if inflation is trending? What will that do to consumer confidence? There is already clear signals that inflation is hitting the essentials - that is food and fuel - and the harvet forecasts look quite grim, possibly leading to further price hikes.

OK, so inflation is lower than the last quarter at 3.9% but can the UK survive with high prices and low growth?

Over in the Eurozone, things are less clear. Obviously tempering the heat will benefit Germany and the Netherlands but how will a strong Euro benefit those struggling in the periphery?

Finally,  there was an interesting comment by Jürgen Stark, Member of the Executive Board of the ECB,
at the “ECB and its Watchers XIII” conference in Frnakfurt today where he explicitly rejected the idea of relaxing monetary policy: "Easy money cannot and will not address the root causes of the crisis".

However, as always, there is a sting in this particular tail, I believe that to a degree Stark is right about easy money - as far as Germany and Netherlands are concerned - but as I, among others, have consistently said, for Ireland, Greece and Portugal, easy money is precisely what is needed to get them out of their morasses and they should not simply be dismissed as a "mere 6% of the euro area GDP" as EU President Herbert Van Rompuy did this morning. 

I'm sure those countries' "perspective" differs to that of the president.   

IMF

So the IMF says keep going to George and the government.

That is good for George who dismissed economists who criticised the plans in the weekend papers as "left-wing academics".

But there are still danger signs on the horizon of sluggish growth and higher inflation. On the other hand, inflation is expected to drop back to 2% next year according to the IMF.

Now whether that is because no-one will be buying anything because we are all skint or, whisper it, the Bank of England is correct and the inflation wasn't trending remains to be seen.

What ever happens next, it seems that once again we have dodged the bullet.

Napoleon said he wanted lucky generals, I wonder if the same applies to chancellors?

BoE TURNS TO TEENAGERS OVER INFLATION

Far be it for me to make fun of an initiative designed
to promote financial awareness among teenagers but, in light of government figures out today and the missed inflation target once again, should we be worried that the MPC may have run out of ideas?

This week marks the launch of the twelfth Interest Rate Challenge, the competition designed to give 16 to 18 year old students across the UK the opportunity to take on the role of the Bank’s Monetary Policy Committee (MPC) and set monetary policy for the UK to meet the inflation target of 2.0%. 

Bank of England press release 

Yeah, I know it's the 12th such competition but I couldn't resist!

photo: FreeFoto.com