Inflation
Been a while since I wrote here. Happy New Year.
Today I am thinking about inflation.
2010 is upon us and the new VAT rate has hit the UK - at around 2.5% more than the previous one.
Companies have spent a horrible year firing people and tidying up their finances, with business being difficult.
If I get the psychology of a businessman right, this is what will happen:-
- He will need to increase prices by 2.5% anyway, just to pass on the VAT increase.
- He is feeling business may be turning a corner and is by now tired of talking doom and gloom and saving money.
- He will therefore try to "round up" the increase so the prices make sense and so he can pass on an inflation of 2-5% on his prices after over 12 months of recession.
Tada! Inflation of 5-7% is possible if customers will accept it.
Will they?
I don't think this is likely in a lot of products, but it might be especially on low value essentials like food, Internet connections, car repairs, etc.
I don't see the Bank of England raising interest rates until after the election. While the economy is doing better, any effects of interest rate changes take time to be felt, and the BoE will want to know what the economic plans of the next government will be before taking action.
I do therefore predict inflation kicking in certainly in the first half of 2010. Later, I expect it to become a talking point. After that I expect a new government to take some "tough" measures, which will dampen confidence (and inflation with it).
Benefits system
Simon Heffer has a column in today's Telegraph discussing the flaws of the UK benefits system.
It raises some important questions. Unfortunately, it also tries to sell a certain political party in the process, which devalues the issue discussed to just mere politics.
But here's one:
The report [on reform of the benefits system, published today by the Centre for Social Justice] is laced with models and case studies. “Why”, it asks, “do those most in need of encouragement have the greatest penalty”? A young man working 25 hours a week in a part-time job will, they show, lose 84 per cent of his new wage in taxation and loss of benefits. A lone parent would lose 61 per cent. A low-income couple who choose to live together – such as for the purpose of bringing up children – will lose £1,350 a year by doing so. So the benefits system, as we currently have it, has failed. It keeps people from looking for work, because their marginal gain is frankly not worth it; and it institutionalises the breakdown of society, not just by removing incentives for individuals to be productive, but by encouraging that underclass of single parents that sociological surveys since Charles Murray have shown lead to poverty, criminality and underachievement by their children.
I often wonder the same.
Britain is sleepwalking towards a decade of economic misery
Just found this very interesting critique on the well publicised "economic recovery".
In fact, I have been wondering about the recent turn of the market and how it may move from September for some time. Throughout Europe and the US, stock markets are up, consumer confidence is up, and property prices are turning. Most analysts are now talking of an economic recovery.
However, looking at fundamental issues, all one can see is indebted countries, indebted citizens, and no real evidence around of any meaningful production apart from services to be consumed within the country itself.
No one can really tell me what Europe and the US is planning to sell as a collective "Western World" to buy whatever is being imported from the Far East and Africa.
It won't be banking services, that's for sure.
It feels like the Greek model of development all over again. An economy that is constantly in deficit, with any production really only serving internal consumption, served by a deluded consumer base which is confident for no apparent reason.
It can't be sustainable. The question is just how quickly people will realise. It took years last time, and the make believe seems to have returned pretty quickly.
The BBC Box
I've been following the BBC Box for some time now and thought I'd post about it here.
Apparently, the BBC has painted a container with its branding and fitted it with a GPS tracker, mapping its route over an entire year and talking about global trade.
This started at a time when global trade was booming and the theme was how the box travelled full from Asia and empty back to it.
Things are taking their toll over time though, and the global recession hit (perhaps as a result of this trend).
The box has been left empty in a yard since April as the haulage company has no shipping orders to fulfill. The recession has reduced world trade significantly in recent months, worryingly so as the collapse in world trade following the 1929 crash brought about the depression that ensued.
Pay back time
It's funny how when people were borrowing endlessly, nobody was worried. Mortgage equity withdrawal has been increasing for years before the bubble burst. Few analysts were worried about this - it was a new era when money would be forever cheap and plenty.
Now, customers don't like the idea of paying 7% interest when the Bank of England has dropped its own rates to record lows, and have started the painful process of clearing the debt. If we are to return to stability, this may take years. Unless of course inflation kicks in to reduce the value of this debt. Paying back the debt means less spending, and of course this has the analysts disturbed about the effects on the real economy.
The graph from The T elegraph tells part of the story.
This would suggest things may soon be back to equilibrium.
What it doesn't say is that these positive bars in 2007 stretch back almost a decade (from The Economics Blog):
Inflation
Not too long ago I was writing about deflation hitting the UK economy.
Well, I may have been too quick. More recent reports and the markets seem to now expect inflation - and I mean serious inflation.
A businessman I was discussing with yesterday was worried. He noted that all governments had printed money too fast to get us out of the recession, and suggested this had happenned more than publicised. If all this money is around, it will surely lose its value.
This was a businessman from overseas, who was keen to buy real assets with his cash and was shopping around for land, property, gold and oil. And his only worry was that commodities and property are sold in local currency which means they are exposed as well.
The problem of course is not monetary. When you have a country that doesn't produce anything, printing money will just be translated into inflation in the long term. This is known. The challenge here is for all this trickery to create some business growth quickly before markets realise that cooking the numbers doesn't make a country stronger financially.
I wonder if Adam Smith (featuring on the £20 notes) had thought about all this government intervention in his free market theories. I somehow doubt so.
The trillion dollar question
A very interesting article in the Telegraph talks about the shift in economic muscle taking place between China and America in the current economic crisis.
To simplify the story, think of an unhappy marriage in which one partner does all the saving, while the other does all the spending. (We all know at least one couple like that.) But then the partner with the retail therapy habit maxes out on his/her credit cards. At the same time, the parsimonious partner finds her/his job under threat. What previously was a stable relationship is suddenly on the rocks.
To me, it's not a question. People who work hard and save money always do better than fly-by-nights who borrow, spend, and then borrow more. The same will apply for nations. If an American bank predicts China's GDP to overtake America's by 2027, my bet is that we won't have to wait that long.
The penny drops
Reading this post will cost you about 10 pence.
According to figures that have been described as optimistic, the UK government is set to borrow an extra £700 billion over the next five years.
There are countless figures and articles trying to put this in perspective using various techniques, including writing the full £700,000,000,000 number, or saying that interest payments for this amount will be more than the UK budget for defence.
There are then of course those who recall those bankers were deemed evil for borrowing too much with no real plan for repaying.
I decided instead to do this to understand the concept of time:
60 minutes x 24 hours = 1,440 minutes in a day.
x 365 = 525,600 minutes in a year
x 5 = 2,628,000 minutes in 5 years
And this to break down the numbers:
£700,000 million is the new debt (note the word new, this is to be added to existing debt)
26 million income tax payers in the UK
i.e. £26,923 new debt for each tax payer.
And then worked out that
£26923/2,628,000 minutes= £0.01 per minute
Equals 1p a minute
Every UK tax payer (me including) will borrow 1p a minute every minute, even when they sleep for five years.
And paying it back will also cost interest.
And that's also optimistic.
It's like picking up the phone and leaving it connected for five years.
Did the penny drop?
Ten principles for a Black Swan-proof world
Came across this article in the FT recently.
Interesting to see that people have started providing some feedback on what needs to change. I wonder if our politicians will turn any of this into policy.
Less worse
Apparently, there are some "signs of recovery" in the world economy in recent days.
Well, economists and the US President have re-defined "recovery". Yes, unemployment is rising and bankruptcies are rising sharply. Yes, the housing market is still dead. And yes, car manufacturers and others are joining the banks and going to the government for help.
The governments themselves are not too rich either and are slowly creating a debt crisis of their own right.
But, things are getting "less worse" (a new term). That is to say, the stock markets are not falling as much as people thought, housing transactions and values are on a downward trend but not as sharp a trend as people thought, and so on.
In other words, the decline continues, but at a rate slower than some analysts were predicting.
Which could either mean stabilisation is on the way, or that those analysts panicked so much with "sell sell sell" as they did with "buy buy buy" in 2008.
My advice to everyone is not to listen to analysts, or at least to choose your analysts wisely.