Inflation or deflation? We pit hawks against doves

Depending on who you listen to, the global economy could soon be assailed by ‘deflationary quicksand’ or through hyper-inflation.

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by Matthew Goodburn on Jul 02, 2010 at 08:10

Inflation or deflation? We pit hawks against doves

Economists have rarely been so divided on whether the world will crash into the mountain of inflation or sink into the ocean of deflation.

Here we pit the arch-doves against the arch-hawks.

First up for the doves is Société Générale’s global strategist and arch-bear Albert Edwards. Not one to pull his punches, Edwards describes the central banks and economists in charge of fiscal and monetary policy as ‘clowns’ who, he believes, are dragging the world back into recession.

While he thinks fiscal hawks are right to believe current Western financial markets are unsustainable – and their governments insolvent – he thinks doves are correct in thinking current tightening will push us back into recession.

Edwards warns: ‘With core inflation rates now sub 1% in the eurozone and the US, we are only one recession away from Japanese-style deflation. Recent fiscal tightening will hasten the speed of our descent into this quagmire.’

He believes that further out, super inflation will be the only (or least bad) way out of the mess.

Counter to this, some hawks are concerned that the loss of independence by the Bank of England means there has been a certain complacency over rising interest rates.

Brooks Macdonald’s head of Edinburgh office Gareth Howlett (pictured) believes the Bank was turning a blind eye to the inflationary threat.

Howlett notes that one member of the Monetary Policy Committee, Andrew Sentance, voted at the last MPC minutes for action to control the threat of inflation.

Howlett said: ‘It’s far too politically convenient to have a degree of inflation right now. Do you know anyone who is paying more than 2.5% for their mortgage at present?

‘I think everyone’s mortgage in the UK is below interest rate levels. That’s hugely stimulating. We are in a phase where the economy is going to be reflated because we’ve got so much debt in the system,’ he added.

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5 comments so far. Why not have your say?

I see modest deflation as being highly desirable and preferable to any level of inflation. Goverments and individuals should live within their means and some deflation makes life harder for them while benefiting people who save.

Why should honest and prudent people be robbed of their savings to benefit those who are dishonest and profligate and live beyond their means? If we have deflation - so be it.

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Well said Ian.

Questions for Blancheflower, where is the money for the stimulus going to come from and who are the main people who are going to have pay for it.

Does he run his household finances in the same way, and if so, when is he filing for bankruptcy?

The current stimulus is being largely funded by savers, not the bankers (they are still taking astronomical bonuses without paying paying one brass farthing back for bonuses taken when huge losses were being run up) and the bank's balance sheets are being bolstered with the money that should be paid to savers, whilst they are also raking in barrow loads of money from borrowers who cannot believe their luck that they are being let off from paying a proper rate, all because there are many borrowers who over extended themselves and any proper rate would see foreclosures..

This is is not a level playing field. If you are in the stock market on borrowed money, tough luck.

If you are a borrower and bought property you could properly afford, the position is the govt is there to bail you out, at the expense of savers, many of whom have to dip into capital to make up for the shortfall in income from the investment. Unfair and unjust and in many instances, in the case of borrowers, merely prolonging the agony, and for many throwing good money after bad.

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"Secure" government bonds appear to be pricing in deflation or near-deflation, yet the gold price seems to be looking for substantial inflation. Maybe the explanation is that investor opinion is divided, or even that some are attempting to hedge both outcomes. In reality, muddling through for now somewhere in between may still be more likely for now, narrow though that path looks.

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I agree with Bill Bishop, and the quoted experts: no crystal ball, hedge. Asset allocation will help all in hedged outcomes. I like high yield Tobacco Municipals stateside, and Shanghai Index ETFs worldwide for new money, but my asset allocation of 80% bonds, 10% stocks, and 10% real estate for my 56 yr old retirement will do me fine.

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A jock strap

Jul 03, 2010 at 02:19

Inflation is here now in Spain and other Euro Zone countries.

In the UK VAT increases will cause inflation along with fuel costs.

All other analysis is bunkem. Any rate hikes in BR will kill any recovery stone dead.

We need Austerity Get Real in the public sector. BECAUSE the UK is Banca Rota like many EU countries. There is no money for public sector wages wihout borrowing it. Overpaid health service workers police and fireman and BBC execs MUST take pay cuts now and live in the real world. As should BA strikers...... The UK interest bill rises daily still............. Chancellor G.O. is right but will need to battle with Public Sector Unions as we enter a Winter of Discontent, like Greece, Italy and others..

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