Stagflation

The Sunday Telegraph this weekend reported in shocked tones that the spectre of 'stagflation' was rearing its head. That's odd, I thought, I could have swor that I have been warning of the return of stagflation for a long time now. So I had a look back and here are some of the posts that I have made...

1) 28 December 2007 - 'The party's over' -

'A quick prediction for 2008 that will not warm the cockles of Gordon Brown's heart.

The economy is screwed...

OK, a bit more detail; the economy is well and truly screwed... The pound is about to go into free-fall and so Gordon will want to support it by raising interest rates but that will hit the hard-pressed home buyers who have believed Gordon Brown's "end to boom and bust" rhetoric. Also Gordon has tasked the Bank of England to suppress inflation and even his "preferred" (for which you can read artificially reduced) measure will be going up as inflation enters the economy so the BofE will want to reduce interest rates, but that will suck in more imports and so increase inflation. At earlier points in the economic cycle, Gordon has raised taxes (albeit stealthily) but whilst that was possible in good times without too much protest from the tame media, the media are now less tame and (apart from the ever loyal BBC)increasingly willing to criticise Gordon's government.

It really doesn't look rosy for Gordon, stagflation is on its way and we are in for a very unpleasant four or five years; it could make 1929 look like a mild downturn. Sorry to be the voice of doom but I think it best we face up to reality. '

2) 14 November 2007 - 'Stagflation':

'The economic news just gets worse and worse for Gordon "an end to boom and bust" Brown, today we can read at Motley Fool that

"Shares are sinking, house prices heading south and consumer spending is constipated. Can it get any worse?

It can. Inflation is back on the agenda.

Britain's benchmark retail price index rose more than expected last month, and danger signs are flashing that shop prices could soon be heading even higher."

Oh dear Gordon, being PM isn't as much fun as you thought, is it? Is the economy about to crash and burn, will that make you sad or angry, or both? Do you wish you had called an election immediately you took over from Tony? Too late now, the end of Gordon Brown's reputation for economic competence is nigh. '

3) 27 November 2007 - 'Economy in Tatters part the upteenth but not the last' - I think this article is important to re-publich at puts the lie to the 'narrative' being faithfully presented by the BBC on their labour partners behalf that the economy is failing because of Tory cuts:

'Poor, poor Gordon; he spouted his usual litany of factors that prove his economic genius. Unfortunately whilst in the past the media and so the general public would have believed him or at least said "well he has done quite well, hasn't he", this time he may have more problems. It appears that the economy is getting closer to the point of collapse - "The City was last night calling on Alistair Darling to raise taxes or cut spending after news of an unexpected deterioration in the government's coffers raised fears of a looming £40bn hole in the public finances. In a fresh blow to the chancellor, data from the Office for National Statistics showed that despite a robust performance by the economy in the first seven months of the year, the government borrowed more money in this period than at any time since Labour came to power in 1997. The ONS said that in October - normally a bumper month for corporation tax receipts - the exchequer had a surplus of £1bn, but this was down on the £3.5bn surplus in the same month last year. That left net borrowing for the first seven months of the year at £24.2bn, up from £17.5bn in the same period of 2006-07. Analysts said that with both the Treasury and the Bank of England forecasting that the economy will slow down in the coming months as a result of higher interest rates and the credit crunch, the prospect was for net borrowing in the current financial year to be even higher than the £38bn deficit pencilled in by Mr Darling in last month's pre-budget report. In the PBR, Mr Darling said the government would not meet the budget forecast for borrowing of £34bn, but John Hawksworth, head of macroeconomics at PricewaterhouseCoopers, said the total for both 2007-08 and 2008-09 was likely to be "£40bn or more". He added: "At this point in the economic cycle, the public finances should be improving in order to provide some 'wiggle room' in the event of a future cyclical downturn. "The fact that they are getting worse will be of concern to the Treasury since it suggests possible structural weakness and potential need for further tax increases or greater spending restraint.""

I am sorry folks but when borrowing reaches these levels, whilst inflation is on an upward curve, house prices start to fall and rises in economic output look shaky, it is time to look up the word "stagflation" in the dictionary.

Poor Gordon, if only you had called an election when you had the chance; you would have won and you would now be 5 years from an election. Now you are a maximum of 2.5 years away from an election. I think 2.5 years should be nicely in the middle of a massive recession, well done Gordon you have really screwed the country up. Never mind though because your pension is nicely index-linked; it's just a shame that you'll have to spend most of it on security to keep the general public that you have so royally screwed from getting their revenge. '

Here comes the usual Labour legacy of INFLATION

The BBC report oh so quietly that:

"The UK's inflation rate will rise above 3% in the coming weeks, the governor of the Bank of England, Mervyn King, has predicted.

Presenting the Bank's quarterly inflation report, Mr King said the increase in VAT and higher petrol costs would push up prices.

But, he added, inflation would then quickly fall back below the 2% target.

The governor said that he expected "a gradual recovery" in the UK economy over the coming year.

In December the official rate of inflation reached 2.9%. If inflation moves above 3%, the governor is required to write a letter of explanation to the chancellor. "

Remember a year ago the Bank of England was predicting that would inflation would fall into the range 0 to 1% pa, with a significant risk of outright deflation? I didn't believe them then and I doubt anyone is expecting deflation now. As I have said over and over again this Labour government's legacy will be just like previous Labour government's legacies - inflation; all that is in doubt is how high the inflation rate will rise and how long it will take to tame.

Horrendous economic news excused by the BBC

The BBC have excelled themselves this lunchtime. They report that "Consumer Price Index (CPI) inflation rose 0.6% last month, taking the annual rate up to 2.9% from 1.9% in November." but it's not one of the main headline stories and although the article contains such information as, the very scary, "That was the biggest monthly rise in the annual index since records began and exceeded the City's expectations for an increase to 2.6%." and "This was a rise from 0.3% in November, and also constitutes the biggest monthly rise in the annual rate of RPI inflation since 1979." The BBC are quick to list the reasons why we should not worry and so provide their Labour government with excuses:

"The annual increase in CPI mainly came about because of a number of unusual factors that had depressed prices a year earlier."

I would suggest that such terrible economic news under a Conservative government would have received somewhat more complete coverage, more wailing and bemoaning the economic disaster and interviews with the opposition. However under a Labour government all is peace and quiet, don't scare the population especially this close to an election.

In fact this news means that we are just starting on the path to traditional Labour high inflation, in fact stagflation which I and others have been predicting for quite some time now. Don't expect to see or hear Robert Peston or Nick Robinson discussing Stagflation any time soon, after all there is a general election to be secured for Labour first. As I have said before, there is still time to buy gold (and silver).

Stagflation

The BBC 10 o'clock news and finally stagflation makes the BBC news, only seven months after I first blogged about it. The BBC have managed not to mention Gordon Brown in the whole headline piece, inflation is all the fault of the Bank of England apparently.

Stagflation?

Following my posts here and here in November as well as here, here and here in December regarding stagflation, I now read in the Guardian's "Comment is Free" that Joseph Stiglitz is of the same opinion.

"The world economy has had several good years...the good times may be ending...Until now, three critical factors helped the world weather soaring oil prices. First, China, with its enormous productivity increases - based on resting on high levels of investment, including investments in education and technology - exported its deflation. Second, the US took advantage of this by lowering interest rates to unprecedented levels, inducing a housing bubble, with mortgages available to anyone not on a life-support system. Finally, workers all over the world took it on the chin, accepting lower real wages and a smaller share of GDP....That game is up. China is now facing inflationary pressures. What's more, if the US convinces China to let its currency appreciate, the cost of living in the US and elsewhere will rise. And, with the rise of biofuels, the food and energy markets have become integrated. Combined with increasing demand from those with higher incomes and lower supplies due to weather-related problems associated with climate change, this means high food prices - a lethal threat to developing countries. Prospects for America's consumption binge continuing are also bleak... slower growth - or possibly a recession - in the world's largest economy inevitably has global consequences. There will be a global slowdown. If monetary authorities respond appropriately to growing inflationary pressure - recognising that much of it is imported, and not a result of excess domestic demand - we may be able to manage our way through it. But if they raise interest rates relentlessly to meet inflation targets, we should prepare for the worst: another episode of stagflation."



I am but a humble NotaSheep, In 2001 Mr Stiglitz was awarded the Nobel Prize for economics.

The party's over

A quick prediction for 2008 that will not warm the cockles of Gordon Brown's heart.

The economy is screwed...

OK, a bit more detail; the economy is well and truly screwed... The pound is about to go into free-fall and so Gordon will want to support it by raising interest rates but that will hit the hard-pressed home buyers who have believed Gordon Brown's "end to boom and bust" rhetoric. Also Gordon has tasked the Bank of England to suppress inflation and even his "preferred" (for which you can read artificially reduced) measure will be going up as inflation enters the economy so the BofE will want to reduce interest rates, but that will suck in more imports and so increase inflation. At earlier points in the economic cycle, Gordon has raised taxes (albeit stealthily) but whilst that was possible in good times without too much protest from the tame media, the media are now less tame and (apart from the ever loyal BBC)increasingly willing to criticise Gordon's government.

It really doesn't look rosy for Gordon, stagflation is on its way and we are in for a very unpleasant four or five years; it could make 1929 look like a mild downturn. Sorry to be the voice of doom but I think it best we face up to reality.

Stagflation

I was staggered to discover that if you Google Stagflation my site is number 4 on page 1; my old economics teacher would be so proud, xxxx yyyyy where are you?

Samuel Brittan's FT article is particularly good, it starts "There is not all that much difficulty in steering a modern economy when it is faced with one main danger. If that is inflation, the need is clearly to rein back on the growth of demand. If the central bank overdoes the restraint it is not all that difficult to correct its error by loosening its policy. If its first measures prove inadequate, it can step up the dose.

Should the main danger be recession or a severe slowdown it will need to apply a stimulus, for instance by lowering the policy-determined short-term interest rate. A point may indeed be reached where monetary policy needs to be supplemented by fiscal policy, which is a posh way of describing lower taxes or higher public spending, in principle temporary. As long as policymakers do not delude themselves that they can achieve pinpoint accuracy and are not afraid of a little trial and error the task is not all that complicated, and outside analysts are kept in employment predicting their next move.

What, however, should they do if the economy is faced with both increasing inflation and severe growth slowdown? This is the dilemma of stagflation."

Do read the rest of it.


You might want to read some of the other articles as they will give you a very good idea as to what is coming our way - and it will not be pleasant...