Inflation

[vinicius]

I`m reading and trying to understand about the risk of inflation..

When I put it in the actual scenario what I see is:

If inflation takes off the government would have to raise the interest rates to control this levels which could make borrowing less attractive for companies which means less investments and slow grown besides the retail borrowers would make the things worse.

In the other hand, High inflation tends to bring uncertain about prices therefore investments becomes higher risk than before and devalued the money.

So, if the gov does not take steps to control the inflation it would bring us down and if the gov does raise the interest rates it as well would slow down the economy right?

As you can see I did not understand really well and I would appreciate a clearly view of this matter..

Thanks

 

[cristoff]

Other factors come into play too. Increasing interest rates are thought to strengthen exchange rates as hot money moves in to the country where they can get better returns. A possible result of this is that exports become less competitive, decreasing the exchange rate once more.

The UK (in my opinion) presents an interesting situation, quantitative easing has introduced a great deal of money into the economy (possibly) to stimulate lending. Lending creates money in the economy - which gets spent, (generally) leading to inflation (assuming there is no spare capacity left in the economy iirc).

High interest rates may well get used to keep a grasp on inflation, but also taxes can be used (monetary and fiscal policy).

So back to the point you made, increasing interest rates will make borrowing more expensive for companies, perhaps they can generate more money through issuing bonds. I guess smaller companies may struggle far more and have to raise cash from brave investors.

Was that remotely helpful?

 

[Mayfly]

Ambrose Evans-Pritchard makes some insightful observations in his columns in the comment section of the Telegraph - his column (he also has a blog) also attracts some discursive comment from a wide and knowledgeable (opinionated) readership.

Here's a good place to start:

Ambrose Evans-Pritchard - Finance and business comments - Telegraph

HTH

Cheers

Mayfly

 

[montmorencyt2w]

Stagflation?

I think that the scenario that Vincius depicts is what came to be known as stagflation, inflation and stagnation at the same time:

Stagflation - Wikipedia, the free encyclopedia

Unfortunately, it sounds like a rather likely scenario in the future.

 

[poborsky]

I am not a fan of evans pritchard. A good many of the articles in the telegraph are propoganda in my opinion. better places for more independent research i think. Esp on topics like inflation.

 

[Mayfly]

Re: stagflation

Maybe, but there's no sign of it yet:

Gold bugs at last have their perfect trinity - Telegraph

Although, it appears that some people such as top hedge fund manager John Paulson are backing the idea with some serious money?

Regards

Mayfly

PS - also, in reply to my faux pas above! :whistling

I am not a fan of evans pritchard. A good many of the articles in the telegraph are propoganda in my opinion. better places for more independent research i think. Esp on topics like inflation.

I can understand why you're not a fan of Evans-Pritchard; the tragedy for Spain is that it appears that he's been right about the prospects for Spain (and others) all along?

 

[Jaydee]

I think you should take a step back and understand what causes inflation first. I think you will then be able to see the risks more clearly from this.

Essentially, inflation is caused by an increase in money supply, a decrease in economic output (GDP) or (the most likely scenario) a combination of the two. Why?

Our currency is backed by the future earnings of the populace of the UK - before that, many years ago, it was backed by Gold and, even before that, it was back by Sterling Silver. One Pound Sterling was worth exactly the weight of 1 pound of Sterling Silver - hence, the name, Pound Sterling. As the price of silver changed, so did the intrinsic value of the pound.

As our currency changed to something known as a Fiat system, i.e. currency is backed by taxation (which is, in turn, backed by GDP), the value of the Pound is directly liked to our economic output. So, if the economic output falls, so does the Pound's value and vica-versa.

Now, look at money supply. If only one Pound is in existence, its value will be that of the UK's economic output (call it X).

Now, let's say more people need Pounds, the Government (via the Bank of England) chops the single Pound up into smaller Pounds (by printing money, for example). Let's say they make 100 new Pounds from the old, single, Pound.

Before:
Single £ = X

Now:
100 £ = X
Therefore, £1 = X/100

The Pound has been devalued.

Hopefully, from this, you should be able to see where inflation comes from and now be able to understand the risks from it more clearly.

Best

JD

 

[poborsky]

I can understand why you're not a fan of Evans-Pritchard; the tragedy for Spain is that it appears that he's been right about the prospects for Spain (and others) all along? [/QUOTE]

I think the jury is still out on that. Mr evans pritchards beliefs about the med countries is based on the fact that they are unable to print their way out of economic crisis and that this is a viable option for the UK and US. As this thread is about inflation then I think inflation may be the judge.

 

[Black Swan]

I think that the scenario that Vincius depicts is what came to be known as stagflation, inflation and stagnation at the same time:

Stagflation - Wikipedia, the free encyclopedia

Unfortunately, it sounds like a rather likely scenario in the future.

Bingo, a lost Japanese style decade is the best we (the UK) can hope for. Once a govt. adopts zirp and in effect nationalises the banks then you're in it deep for a decade or more. I find it quite staggering that so many meeja pundits are still sleepwalking and in denial as to what really happened in the last two quarters of 2008. The artificial doldrums we're currently in merly signal the next leg downwards. Zirp is economic super glue...

 

[Mayfly]

Err, I think you'll find that Japan's lost decade was more deflationary than inflationary!

Unless, you're referring to the results of the carry trade on this "side" of the world? But, that's a different story....

 

[Black Swan]

Err, I think you'll find that Japan's lost decade was more deflationary than inflationary!

Unless, you're referring to the results of the carry trade on this "side" of the world? But, that's a different story....

I'm well aware of Japan's prblems and how they originated/escalted, I'm using Japan as a reference point as to how (once zirp is approached/adopted) you're kinda stuck, but are you suggesting that atm we're not in a deflationary period which the govt's are not desperately fire fighting by using money creation?? What comes later is anyones' guess, 'moderate' hyper inflation (if such a phenomena can exist)? A lost decade is our best hope..

 

[Mayfly]

We're living in very dangerous times as you say, my point was only that stagflation (pace the wiki) falls hopelessly short of the mark as a way of understanding the nature and scope of the problems we're facing - to say the least.

 

[cristoff]

Im not sure anyone is in a position to say how bad inflation / stagflation will be over the next decade. (my understanding of stagflation was unemployment and inflation)

Unless i missed it, has anyone made an estimation of the current money multiplier / velocity. how much 'extra' money effectively is there.

I dont disagree that we will see some inflation above what we have become used to in the next decade, however I doubt it will be hyperinflation.

 

[TheBramble]

I can understand why you're not a fan of Evans-Pritchard; the tragedy for Spain is that it appears that he's been right about the prospects for Spain (and others) all along?

I think the jury is still out on that. Mr evans pritchards beliefs about the med countries is based on the fact that they are unable to print their way out of economic crisis and that this is a viable option for the UK and US. As this thread is about inflation then I think inflation may be the judge.

You might be right about the jury still being out, but with current levels of unemployment, the real estate collapse and general banking insolvencies I suspect all the data is in plain view. Whether the reaction to that data is rational is another issue altogether.

Loans to Spanish develops stand in excess of EUR 318 Billion - more than 800% up in just 8 years. Adding general construction sector debt the O/S rises to almost 50% of Spanish GDP. Your guess is as good as mine on just how much of that debt will be repaid, but I’m guessing very, very low.

 

[montmorencyt2w]

Talking of hyperinflation, I posted this link elsewhere, but may be of interest here:

Could the Weimar Hyperinflation Happen Again in America? :: The Market Oracle :: Financial Markets Analysis & Forecasting Free Website

 

[zambuck]

....Thatcher used monetary policies to control inflation...it failed....

.....Brown used fiscal policy and proclaimed that boom and bust is over......it failed....

.....No one including Greenspan et el could forsee the tidal wave that came....

....With Financial 'Global Village Market' now in operation and with BRIC on the fold, with their economies doing better than western ones, it will be interesting to see what will be contained in the baskets that determine inflation.....

 

[poborsky]

I think the jury is still out on that. Mr evans pritchards beliefs about the med countries is based on the fact that they are unable to print their way out of economic crisis and that this is a viable option for the UK and US. As this thread is about inflation then I think inflation may be the judge.

You might be right about the jury still being out, but with current levels of unemployment, the real estate collapse and general banking insolvencies I suspect all the data is in plain view. Whether the reaction to that data is rational is another issue altogether.

Loans to Spanish develops stand in excess of EUR 318 Billion - more than 800% up in just 8 years. Adding general construction sector debt the O/S rises to almost 50% of Spanish GDP. Your guess is as good as mine on just how much of that debt will be repaid, but I’m guessing very, very low.[/QUOTE]

I think you are right. not a lot of that debt will be getting repaid. unemployment is still on the up and things look bleak, but thats the case everywhere. I am not a big believer in govt statistics on gdp, inflation or anything else in particular. They are certainly manipulated and in many cases just downright lies. What i do think will happen is that the countries that print a lot of money and think that they can pay debt off by inflating it away are in for a harder time in future years than countries that bite the bullet now. I may be totally wrong on this, but from memory the main cure for high inflation is high interest rates, which in turn causes a housing price collapse and forces companies out of business..........