Posts Tagged ‘Gordon Brown’

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It is the great dread. Right now, inflationary pressures are weak in the Eurozone, and deflation is seriously looking like it is back on the agenda. But suppose, just suppose, that from out of nowhere inflation starts to rise, and central banks find that, in order to keep it in check, not only must the rate of interest rise, but the real rate of interest – that is to say relative to inflation – must rise too. It won’t happen, you might say. Why should inflation rear its ugly head at times like these? Well, don’t go so fast.

There are deeper forces at work, and there are reasons to think that in the next few years inflation may return. This is why.

During the boom years central bankers must have had sore vertebrae. They must have because economists, and finance ministers around the world kept slapping it. To let you into a secret, it seems that to an extent central bankers also slapped their own backs – albeit in a subtle way. Mervyn King gave Alan Greenspan’s spine a good tingling; Greenspan let his hand fall upon Mervyn’s spinal column.

The IMF was at it too, slapping away. Why such so much friendly smacking? It all boils down to NICE: that is to say non-inflationary, continuously expansionary. During the noughties, and indeed the late 1990s, economies in the developed world (with the exception of Japan) enjoyed the best of both worlds: strong growth, but modest inflation. Central banks were held up as the reason. Even Gordon Brown received some praise for giving the Bank of England independence, and giving it free rein to do what was right.

These days, central bankers’ savvy is not quite so appreciated, but even so, only a few months ago, they were being cited as the main reason why inflation across the world is so low.

But here is an alternative view for you. Maybe there was another cause of such low inflation. Perhaps there were even two main causes: globalisation and technology. The Internet created unprecedented price competition, while technology helped more efficient production, which led to lower costs. And the rise of emerging markets led to far cheaper manufactured goods, which were imported by the West from factories in Asia.

The part played by commodities in all this confused the picture. The rise of China may have meant cheaper manufactured goods, but also led to a rise in demand for oil, metal and then food. So we had downward inflation pressure on manufactured goods, and upward pressure on commodities. This confused the picture, and may have fooled central bankers, leading them to make mistakes.

But are the forces putting downward pressure on prices still in action? Maybe the Internet effect in creating price pressure via the magic competition was a one-off.

Now take globalisation. Earlier this week, LGIM economist James Carrick suggested that many of the forces that helped globalisation push down on prices are moving into reverse.

He said: “LGIM research shows that [the] increase in global import penetration effectively reached a plateau in 2006, largely due to changes in the Chinese economy. This has grown massively since joining the WTO, but it is also maturing quickly. Greater use of technology and more sophisticated production capabilities mean that China is getting richer and its workers are paid more.

“If the benefits of shifting basic assembly work to China are decreasing, companies will keep production closer to home, an effect we are seeing already with Mexico no longer losing market share in the US. This ultimately means firms can’t keep cutting costs by using cheaper suppliers and therefore will result in higher inflation.”

Mr Carrick reckons there are already signs of this change in the nature of globalisation putting upward pressure on inflation. Well maybe, but to be frank it is early days. We are talking about a trend that may take several years before it becomes obvious.

But would a rise in inflation be a bad thing? After all, inflation is a good way to reduce the real value of debt.

It depends. If we get wage inflation too, then household debt will suddenly look more manageable, and nominal government tax receipts will rise, making government debt look less frightening.

But…suppose wages don’t rise. Suppose prices rise, making us all worse off, interest rates rise making those with debts even worse off, but wages rise more slowly. That would be a nasty set of circumstances.

One thing seems likely. If inflation does start to pick up substantially later this decade, bond prices will suddenly look way too expensive, and we may well see their values crash.

Central banks may have less say over inflation than they are given credit for and QE may be less inflationary than it is assumed. But QE has forced up asset prices, and if external factors then cause a crash, the fall-out would be very unpleasant. If all this happened, maybe, as a punishment, we would need to give central bankers a good flogging.

© Investment & Business News 2013

Do you remember when Gordon Brown sold much of the UK’s gold reserves? Not a good move that, since the yellow metal soared in price soon afterwards.

Then again, back then gold was not fashionable. Keynes called it a barbarous relic, and for a while during the noughties, that description seemed about right. Could Brown have known how much things were going to change?

They did change, and gold became many investors’ best friend.

The thing about gold is psychology. You can’t do much with it, other than look pretty when you wear it – although it is a good semi-conductor. But because of gold’s history, and its presence in our psyche, it is seen as safe, really safe, safer than houses, as safe in fact as gold.

But the yellow metal has not being doing as well of late. Back in the summer of 2011 it was trading at about $1,900 a troy ounce, now it is down to around $1,560.

Maybe it is not so safe.

In recent years, the price of gold has been correlated with expectations of US QE. It was seen as a hedge against the dollar as much as anything. The Fed is not so QE friendly these days. The latest minutes revealed that many Fed members felt QE needs to slow down.

But consider this point of view. If gold can’t do much, in times of really big trouble when we need money, why hold on to it?

The combination of austerity, lack of QE and sovereign debts in the Eurozone is combining to tempt many countries to sell their gold.

Cyprus is selling 400 million euros worth. It needs the cash, for obvious reasons. For almost as obvious reasons, it may have timed the sell-off perfectly.

Will other countries follow suit? Is gold going back to being a barbarous relic?

©2013 Investment and Business News.

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