Sunday, 29 December 2013

Government Size Nines and Runaway Inflation.

I did blog a few years back that thanks to quantative easing that when the recovery came, we'd be staring at runaway inflation. Well, it looks like my fears are now gaining traction in the mainstream and that with even a slight (hundredths of a percent) improvement in the economy, the debate instantly flips to keeping a lid on inflation.

Well sorry, it won't happen. You can't keep a lid on natural forces. You pump funny money into the economy, you reap the rewards. Its a money bubble created by pumping money that wouldn't normally exists into the economy.

Just as the government is pumping money into the housing market and thereby inflating house prices (especially in London).

I blogged early on in the credit crunch that house prices were inflated by as much as 30% over what they should be in a normal market (way more in London). Cheap loans pushed the price up way beyond a sustainable level. House prices should be no more than three times the average wage at any state of the economy, but thanks to downward pressure on wages and cheap loans house prices are now running around 5-6 times the average wage. Its unsustainable and cannot be justified.

Of course Labour loved it because while they were surfing the cheap credit wave people felt as though they were more affluent than they actually were. I mean, how affluent are you if you have an asset that no-one can buy?

The mortage deposit scheme where the government guarantee part of the deposit on a house (any house, including second homes) is just stoking an already inflated fire. But that's what happens when the government put their size nines into anything: it just causes more trouble.

The course is set in only one direction now: the government are going to use inflation is a tool to reduce the effective level of debt. The bad news is that inflation has a way of avoiding control as countless governments in the past have found out. It also means that effective wage levels will reduce even further compared to day-to-day costs.

Those in the retail sector (like me) are going to find the next decade extremely tough as personal spending gets squeezed by rapidly increasing mortage costs, increased energy costs and lower effective wages. Start hunting for those niches people, because to survive you'll need one.

Those not able to adapt to the changing conditions will not survive. Those of you that took my advice from two years ago and reduced your personal debt will have a better chance of survival as you will not have the extra burden of increased lending costs on top of the rest of the misery we're facing.

Sad to say I was right years ago.