The Lemon Fool

https://www.omfif.org/2021/01/the-bank- ... it-matter/

Bank of England officials may have been surprised when they noticed their asset purchases almost matched state borrowing in 2020. Between 1 January and 31 December, the Bank acquired £290bn of gilts. In comparison, net gilt issuance will likely be around £360bn for the same period. By the end of the financial year the Bank will have bought around £320bn-£330bn of gilts, with the budget deficit on track to land in the region of £350bn-£400bn.

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I saw this article floating around and I thought although we have had discussions about this sort of thing so far it does not seem to have had much of a negative effect.

I am, however, of the view that it is not sustainable. I do think we will see an increase in inflation when people are released from interimittent house arrest. Hence I think that holding cash itself has risks. That will also affect fixed interest. However, I don't think anyone has that much certainty as to what will happen (much live Covid really).

johnhemming
I saw this article floating around and I thought although we have had discussions about this sort of thing so far it does not seem to have had much of a negative effect.

I am, however, of the view that it is not sustainable. I do think we will see an increase in inflation when people are released from interimittent house arrest. Hence I think that holding cash itself has risks. That will also affect fixed interest. However, I don't think anyone has that much certainty as to what will happen (much live Covid really).

This is one of the big questions.

Is the Modern Monetary Theory idea that governments can print money indefinitely without causing inflation correct? Or will this magic bullet at some point stop working and lead to inflation?

The main thesis of the gold bugs and now the Bitcoiners is that at some point inflation will happen and hence one should buy gold and bitcoin.

In previous inflationary spirals the too much money chasing too few goods as lead to inflation in times of war, in times of resource shortages and in times when manufacturers could not satisfy demand.

Currently we are not in a war or a build up to one, resource costs are falling in many areas, although nickel and copper have been doing will recently, as there is more re-cycling and more renewable power and China seems easily able to satisfy demand and to keep improving models so that many are only prepared to buy rarely at low price, knowing that in the by and by something better will come along and they don't want to have paid a lot for something earlier that is now less satisfactory.

If anyone can explain how this relentless printing will spike inflation, please post.

Regards,

odysseus2000 wrote:Is the Modern Monetary Theory idea that governments can print money indefinitely without causing inflation correct? Or will this magic bullet at some point stop working and lead to inflation?

Putting aside that question for now.

The theory of the Bank of England is what when inflation ticks up QE stops. This I assume will be CPI inflation.

That, of course, is the really hard thing for government as they will still need some borrowing.

Coming back to the question as to whether there is a point at which printing money leads to inflation. I think the answer is yes, but we don't know when. Probably when people can start spending on hospitality services again.

Rishi clearly does not agree with the MMT as he is reported as saying there is no Magic Money Tree

https://thefinanceinfo.com/2021/01/21/s ... oney-tree/

I think important elements in what happens to inflation are expectation and confidence. If people generally expect inflation, it becomes self fulfilling, and if they lose confidence in the value of the currency that leads to the expectation of inflation. I was a young man in the seventies and that is what happened. The initial trigger was the oil price shock but then everyone, workers, businesses and politicians got used to inflation and the cycle became deeply embedded in the national psyche.

I don't know what event may trigger it this time, but it is very hard to put the cork back in the bottle once it has been released, as Venezuela and Zimbabwe etc found.

scrumpyjack wrote:I was a young man in the seventies and that is what happened. The initial trigger was the oil price shock but then everyone, workers, businesses and politicians got used to inflation and the cycle became deeply embedded in the national psyche.

That embedded trauma in the psyche of people who came of age in the 1970s might be a good reason why we might not have to worry about inflation just yet. The "young men" and women of that time are now running things and remember that all too clearly, which hopefully means they will prevent inflation getting out of hand.

And it wasn't just the 1970s either. The pain lingered a long time. I recall taking out a mortgage in 1991 at 16% interest. Luckily there was tax relief at the time but even so that was tough. As it happened that was the beginning of the long decline in interest rates and inflation, which in turn benefited markets generally.

In fact we already have rampant inflation. It is just in the financial and housing markets. Great for people like us. Even the pandemic has barely dented my returns. The central banks have our backs.

But when everyone who personally remembers stagflation has died off, perhaps it will return. But in answer to the original question, I don't think this sharp rise in gilt issuance matters. Partly because it is in response to a temporary crisis rather than a permanent change. Partly because interest rates are so low. And partly because every other country is doing the same.

That said I have increased my gold positions, mostly via Newmont and Barrick.

johnhemming wrote:I am, however, of the view that it is not sustainable. I do think we will see an increase in inflation when people are released from interimittent house arrest. Hence I think that holding cash itself has risks. That will also affect fixed interest. However, I don't think anyone has that much certainty as to what will happen (much live Covid really).

John,
I agree with you that this is unsustainable.
I also agree that holding cash for the duration of an inflationary period leads to losses.
Counter-intuitively cash is a good place to be as you transition for low inflation to high inflation. All other assets get 're-priced' to match yield to new interest/inflation rates. I'm dithering over whether to start building cash (by stopping re-investing dividends) to await an inflation spike (+market crash?). I know this smacks of market timing heresy...........
tuk020

It's inflationary, and has been inflationary since Gordon abandoned Prudence, around the time of the 2001 election. But the nature of inflation has changed: the rise of Chinese manufacturing kept it out of consumer prices, and it manifested elsewhere. First the house price bubble, then assets more generally as large-scale money-printing prevented a serious house price correction.

Feeding through to consumer prices will now only be a final stage as Sterling crashes, pushing up imports. But with other currencies also debasing, Sterling can hang on to the Dollar's coattails. Non-fiat currencies - most obviously gold and bitcoin - will at some point, prove the place to be.

Funnily enough I suspect furlough money may be less inflationary than earlier QE. That's because it hypothetically just substitutes for real money for services that have been suspended: recipients would ordinarily earn that money by, for example, cutting my hair or serving me a coffee. The losers are people who are not getting the service (i.e. all of us except the very poorest), but it's not money we're losing.

Snorvey wrote:We've been effectively 'financing the deficit' since 2009 and there's been little sign of inflation. Japan effectively finances its deficit and has done for decades. Through that time, they've mostly struggled with deflation, not inflation.

UK RPI Mar 2009 211.3
UK RPI Mar 2021 296.9

40% debasement of purchasing power. People can argue if they like, but that looks like more than a "little sign of inflation" to me.

dealtn wrote:

Snorvey wrote:We've been effectively 'financing the deficit' since 2009 and there's been little sign of inflation. Japan effectively finances its deficit and has done for decades. Through that time, they've mostly struggled with deflation, not inflation.

UK RPI Mar 2009 211.3
UK RPI Mar 2021 296.9

40% debasement of purchasing power. People can argue if they like, but that looks like more than a "little sign of inflation" to me.

3% pa

GrahamPlatt wrote:

dealtn wrote:

Snorvey wrote:We've been effectively 'financing the deficit' since 2009 and there's been little sign of inflation. Japan effectively finances its deficit and has done for decades. Through that time, they've mostly struggled with deflation, not inflation.

UK RPI Mar 2009 211.3
UK RPI Mar 2021 296.9

40% debasement of purchasing power. People can argue if they like, but that looks like more than a "little sign of inflation" to me.

3% pa

And average weekly earnings increased from £435 to £568 over the same time period, i.e. 30% or 2.25%pa.

So not a 40% debasement of purchasing power.

funduffer wrote:

GrahamPlatt wrote:

dealtn wrote:
UK RPI Mar 2009 211.3
UK RPI Mar 2021 296.9

40% debasement of purchasing power. People can argue if they like, but that looks like more than a "little sign of inflation" to me.

3% pa

And average weekly earnings increased from £435 to £568 over the same time period, i.e. 30% or 2.25%pa.

So not a 40% debasement of purchasing power.

That's assuming you have earnings of course. A pensioner living on interest from savings wouldn't for instance.

Regardless the point being a claim was made "little sign of inflation" has been seen. Some would think a cumulative 40% wouldn't sit easily alongside that claim.