Ready for inflation in finance, living costs and
SINCE MONEY MAKES the world go round, more of it would set the earth spinning faster,
would be a good thing, of course...
- "The case for targeting 4% to 6% inflation
is certainly growing," says Australia's
Financial Review, quoted by
Kris Sayce at Money Morning down under;
- "I'm advocating 6% inflation for at least
a couple of years," says former IMF economist and current Harvard
don, Ken Rogoff;
- "It may be preferable to create limited
inflation early on," agrees Spyros Andreopoulos, another economist,
this time at Morgan Stanley;
- "A 2% steady-state inflation rate may be
insufficiently high to stop [zero-interest rates] from having
significant deleterious effects," says John Williams of the San
With it so far? Oh do keep up. Inflation for these
buffoons, as Kris notes in horror, means a rising cost of living.
Which would come about, no doubt, thanks to a surging supply of money
and credit, otherwise known as inflation of the currency. Which can be
sparked either by the printing press or, more typically since World War II,
sub-zero rates of interest after you account for the rising cost of living.
You see, money that retains its value just won't do. "It's soft money makes the world go
round," as a friend at the Economist
magazine put it to me over a pint recently. How else do you think Western
civilization refined itself to our current state of perfection?
Hard money on the other hand – the "sound money"
beloved of pre-War bondholders awaiting repayment in gold – leaves too
much freedom, too much discretion, to private individuals. Safe from an
inevitable loss of value in cash, both savers and investors – as well
as potential debtors – would be left to judge their decisions solely on
the situation's own merits. And that just wouldn't do at all.
Got to keep things moving!
"The strong and prolonged deviation of money growth
from its reference value since 2001 has caused concern among policymakers
about the upside risks to price stability stemming from monetary
developments," wrote three Banca d'Italia analysts in a research paper of May 2007.
In short, the Eurozone's money-growth target – the acceptable
rate of money inflation (well, acceptable to central bankers at least)
– had been informally set at 4.5% per year. Yet through the first
decade of the single currency, however, annual money-supply growth doubled
that rate and more.
Here in London,
chief central-bank pooh-bah Mervyn King also started murmuring about the boom
in credit and lending – then hitting a three-decade peak near 20% per
Surely consumer-price inflation would follow like ice cream follows pizza...?
"Those risks might be smaller than previously assumed,"
suggested Ferrero, Nobili and Passiglia. "Current excess liquidity
conditions are related, to a considerable extent, to the acceleration of
non-bank financial intermediaries' money demand, as well as to the
accumulation of marketable instruments. Such increases are likely to be
related more to portfolio choices than to transaction motives."
This was barely three months before the banking crisis began, you'll
note, and the Trouble with Cheap Money was bound to show up eventually.
Consumer-price inflation was about to surge as well, breaking to decade-highs
across the West as crude oil leapt, dragging base metals and foodstuffs with
it. But "portfolio choices", or so we guess here at BullionVault,
were helping soak up the money inflation that would have otherwise shown up
in "price stability" (or rather the lack thereof). This
substitution brought its own crash-and-burn in the end, of course. But not
before it lulled central bankers into thinking there was hardly any mischief
afoot at all.
"Beginning in the 1980s, the cult of the markets – which
included the development of financial derivatives and the increasing use of
leverage – began to dominate," writes Bill Gross, the dominant
'bond king' at Pimco, the world's largest fixed-income manager.
"A long history marred only by negative givebacks during
recessions...produced a persistent increase in asset prices vs. nominal GDP
that led to an average overall 50-year appreciation advantage of 1.3%
annually...[and so] the return from all assets was 100% higher than what it
theoretically should have been from 1956.
"Financial leverage drove the prices of stocks, bonds, homes, and
shopping malls to extraordinary valuation levels," says Gross. And we
all know to our cost what happened next.
To repeat: The 1980s' deregulation and democratization of speculative
risk meant money-supply growth didn't show up in consumer prices. Credit and
debt meant the "feelgood factor" still applied, but unlike the
wage-hikes of the '60s and '70s, the resulting inflation was frozen in
bricks, mortar, brokerage accounts and pension funds. Nor did the big win go
to the speculators either, not now the casino was so crowded, only the
croupiers were sure to come out ahead. Which is just what they did.
Now the world's great brains want to see real interest rates sink
further, back to sub-zero levels last seen during the late 1970s. Creating
inflation in money is one thing, however; containing it in speculative
card-shuffling quite another. The last three decades of financial
rent-seeking are attempting to make a comeback this fall. But we wouldn't bet
against inflation showing up in the cost of living as well if not instead.
by Adrian Ash
City correspondent for The Daily Reckoning in London, Adrian Ash is
head of research at BullionVault.com – giving you direct access to investment
gold, vaulted in Zurich, on $3 spreads and 0.8% dealing fees.
Please Note: This article is
to inform your thinking, not lead it. Only you can decide the best place for
your money, and any decision you make will put your money at risk.
Information or data included here may have already been overtaken by events
– and must be verified elsewhere – should you choose to act on