What next: Inflation or Deflation? Get ready for inflation – Economics Futurist Keynote Speaker

What next: Inflation or Deflation? Get ready for inflation – Economics Futurist Keynote Speaker


So I’m often asked about Inflation,
Deflation, what are we going to see and of course cost health depends on the territory that you’re in. But, here is a simple fact and I
predicted that this would be the case, oh, many years ago, and have continued
to talk about this for quite a while. For most governments
the fear, the big thing that keeps them awake at
night, is not actually Inflation, it’s Deflation. Why is that? Because Inflation, okay it’s a problem, it’s a challenge, but there are traditional measures to get it under control, although they may be painful. But
Deflation is a toxic poison, which is very difficult to
eradicate from the life support system of the economy
of a country. Let me explain: if you’re in a deflating
environment every thing that you own becomes worth
less as the days go by, and the cash that you own
becomes worth more, so it is literally more worthwhile to put cash under your
bed for tomorrow, than it is to convert the cash
into any product or whatever it is that you might want to
buy, a property or anything else. Because, you can guarantee in a deflating environment, that whatever assets you own are being wiped out. Except for cash. Because if you wait until tomorrow, you can buy those assets for a fraction of the
cost that you would pay for them today. So what it means is that the economy suspends. People stop spending, they, they
stop even thinking about going out to the shops, they don’t want to buy houses,
they don’t wanna do anything. They just want to sit on cash, they count their cash every single
day, and every single day they become wealthier
because that cash will buy more stuff tomorrow. That is a
very dangerous and uncomfortable situation,
it’s a nightmare for central banks, and that is why, banks have always chased an inflation rate, rather than a zero-inflation rate, and actual inflation rate, maybe two percent
or whatever. The problem is this: For the last few years banks have been,
in many countries, chasing a rate of only two percent. Well, the
problem with that is that, stuff happens, you get seismic shocks in
the economy, whether it’s, I don’t know, some
kind of new conflict in the region, it could be, a bird flu pandemic or a big scare about, let’s say a
nuclear meltdown. It doesn’t matter what it is: shocks happen in the system, and when
they do, they can catch central bankers out of their homes as it were, and it can easily knock off one and a half, one and three quarter percent of an inflation rate. And, you can’t
manage inflation rate precisely on let’s say, two percent. It’s always going to wobble up and down by
one, one and a half percent anyway. Just because of the chaos of economic
life. And the fact that these economic models
are impossible to predict with any real accuracy. So what that means is, that, if you’re on a fairly downward spiral, or you’ve just, wobbled around one and a half percent
inflation or even two percent inflation or, even worse, close to 0.5 percent
inflation, and suddenly you get a small economic
shock or a significant one, then you’re in deflation. And bankers
fear that so much, that for years, I have been predicting
that they will consistently allow themselves to target, unofficially, a rate, which is above the official target. And that’s certainly happened with the bank of England, chasing an
official rate of two percent, but the actual rates that have been
allowed have been three percent, 3.5 percent, 4 percent, 4.5 percent, even a rate over 5 percent while officially talking
about 2 percent and that’s actually very sensible. In the
British government’s case it’s been even more sensible from their own government debt point of view because they’ve been borrowing money, hundreds of millions of pounds worth of money at a rate of, sometimes as low as, 2
percent or around that, sometimes less, and then
they’ve been allowing the value of pounds to be inflated away at up
to 5, 5.5 percent, which means that up to 3 percent, or maybe
even more, of the entire national debt of over 1
trillion pounds, 3 percent of it has been inflated away, without repaying a single penny. What a
stroke of genius for the government, at the expense, of
course, of all those that have been frightened of stocks and shares, and frightened of buying gold and frightened of the future and have bought British government bonds at a fixed rate of low-interest
because they just felt it would help them to sleep at night. Well, it’s helped the British government
sleep at night as well. So, we live in a strange world where, actually, we are seeing fundamental
stimulus in all kinds of places, which eventually
will produce a higher rate of inflation than we have seen perhaps, for five, six, seven or eight
years in many different parts of the world. Just look what’s happened in the U.S.
the U.S. using clicks on an Excel spreadsheet, mouse
clicks and that’s all you need to do to create up to eighty-five billion dollars of new
currency every single month, and that’s just been
reduced as the tapering has been happening
of quantitative easing, that’s been reduced to, only, sixty-five billion dollars of new currency every
month, effectively coming into the economy, through different means, manipulations,
buying this, offsetting that, and so on. The British government has already
printed enough pounds, using electronic tricks, and distributed them around the economy,
enough pounds to buy one-third of our entire national debt and
the process doesn’t look like halting fundamentally, you can expect that if there was a further
crisis there will be new stimulus and so on. The European Union, the European Central
Bank is under pressure to do the same, but has been held back by, all kinds of concerns. Realistic, justifed, concerns, particularly in Germany, who have a fiercely
sharp memory of the disastrous years of a Weimar Republic in the 1920’s when, we had hyper-inflation as a result of the German government
printing huge numbers of marks. Why was that? In order to repay
debt that was imposed, in a settlement at the
end of the First World War. As a result of that hyperinflation every
family in Germany has memories of Grandpa wheeling wheelbarrows of cash to go and buy a loaf of bread. And by the time he got there, the bread was
worth so much more that, he needed 2 or 3 wheelbarrows of cash to
buy the same loaf of bread. And that chaos created the climate for, many believe the rise of Fascism, and, later, created the seeds of disconsent, discontent, which led to a second global
conflict: the Second World War. Now, while we can discuss the
exact mechanisms and relationships between different historical events, the fact is, that hyperinflation remains a traumatic
thought in the minds of the German people in
particular, and they will point to more recent examples
of Zimbabwe which had 1 billion percent inflation as a result of printing money and so on. Those are the
reasons why, the European Central Bank is under
pressure not to print large amounts of Euros but to be
extremely prudent and responsible. And, why it is that the British and American
experiments in printing all these dollars and pounds has been considered so financially irresponsible and perverse. But we’ll see how this plays out. I would
say, on balance, over the next 5 to 10
years, we are far more likely to see inflationary
pressures around the world than deflationary ones, we may have
periods of deflation but governments will move heaven and
earth to try and shorten those periods to the smallest possible period of time. And, Inflation, what does that mean?
It means that those who hold assets do well, physical assets do well, those
that hold cash on the whole will do badly because it
will be difficult in that kind of environment to get enough interest to cover all the deflating effects of the value of the money that you hold. And that’s been the situation, in fact, to some degree over the last few
years in countries like the UK, where interest
rates have effectively fallen to zero for savers or very near to that, while inflation as I
say has been running at 1,2,3,4,5 percent. And that means in real terms the value of people’s cash has been going
down and it’s been very difficult for people to protect their wealth. And that
has been a kind of tax and involuntary tax on people who’ve got wealth and an involuntary benefit to those who’ve got huge debt.
Because those with a huge debt have been paying very little for it
and their debts have been wiped out just like the British government’s debts have
been wiped out by this strange environment.

3 thoughts on “What next: Inflation or Deflation? Get ready for inflation – Economics Futurist Keynote Speaker

  1. Here are reasons why I am expecting inflation to far more common than deflation in many parts of the world over the next few years following the biggest economic downturn in living memory.

  2. Hi Patrick, a couple of thoughts. Re inflation/deflation, doesn't it depend on what you are using as a unit of measurement ? Prices of food and energy (which just happens to be excluded from the calculation) have been rising in $ terms, but falling in precious metal terms

    http://stockcharts.com/h-sc/ui?s=$indu:$gold&p=D&yr=3&mn=0&dy=0&id=p86377315972

    Also, if the 'extraordinary accommodative monetary policy  ' on the part of the FED and BoE, is supposed to produce inflation, in the US case, how do you explain the following historic low ?

    http://research.stlouisfed.org/fred2/series/M2V

  3. So who cares if they save? What are they going to save forever? No, they're just going to save more than before, which will increase investement. They won't keep their money under the matress, because they can make more in the banks.

Leave a Reply

Your email address will not be published. Required fields are marked *