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So I'm often asked about Inflation, Deflation, what are we going to see and
of course cost health depends on the territory that you're in.
But, here is a simple fact and I predicted that this would be the case, oh,
many years ago, and have continued to talk about this
for quite a while. For most governments the fear,
the big thing that keeps them awake at night, is not actually
Inflation, it's Deflation. Why is that?
Because Inflation, okay it's a problem,
it's a challenge, but there are traditional measures to get it under
control,
although they may be painful. But Deflation is a toxic poison,
which is very difficult to eradicate
from the life support system of the economy of a country.
Let me explain: if you're in a deflating environment
every thing that you own becomes worth less
as the days go by, and the cash that you own becomes worth more, so it is literally
more worthwhile to put cash under your bed
for tomorrow, than it is to convert the cash into any product
or whatever it is that you might want to buy, a property or anything else. Because,
you can guarantee
in a deflating environment, that whatever assets you own
are being wiped out. Except for cash. Because if you wait until tomorrow, you
can buy those assets for a fraction of the cost
that you would pay for them today. So what it means is that the economy suspends.
People stop spending, they, they stop even thinking about going out to the
shops, they don't want to buy houses, they don't wanna do anything. They just
want to sit
on cash, they count their cash every single day,
and every single day they become wealthier because that cash
will buy more stuff tomorrow. That is a very
dangerous and uncomfortable situation, it's a nightmare for central banks,
and that is why, banks have always chased
an inflation rate, rather than a zero-inflation rate, and
actual inflation rate, maybe two percent or whatever. The problem is this:
For the last few years banks have been, in many countries, chasing a
rate of only two percent. Well, the problem with that is that,
stuff happens, you get seismic shocks in the economy,
whether it's, I don't know, some kind of new conflict in the region, it
could be,
a bird flu pandemic or
a big scare about, let's say a nuclear meltdown. It doesn't matter
what it is:
shocks happen in the system, and when they do,
they can catch central bankers out of
their homes as it were, and
it can easily knock off one and a half, one and three quarter percent
of an inflation rate. And, you can't manage inflation rate precisely on let's
say, two percent.
It's always going to wobble up and down by one, one and a half percent anyway.
Just because of the chaos of economic life.
And the fact that these economic models are impossible to predict with any real
accuracy.
So what that means is, that, if you're on a fairly downward spiral, or you've just, wobbled
around one and a half percent inflation or even two percent inflation
or,
even worse, close to 0.5 percent inflation,
and suddenly you get a small economic shock or a significant one,
then you're in deflation. And bankers fear that so much,
that for years, I have been predicting that they will
consistently allow themselves to target,
unofficially, a rate, which is above
the official target. And that's certainly happened
with the bank of England, chasing an official rate of two percent,
but the actual rates that have been allowed have been three percent, 3.5
percent,
4 percent, 4.5 percent, even a rate
over 5 percent while officially talking about 2 percent
and that's actually very sensible. In the British government's case
it's been even more sensible from their own government debt point of view
because they've been borrowing money,
hundreds of millions of pounds worth of money
at a rate of, sometimes as low as, 2 percent
or around that, sometimes less, and then they've been allowing
the value of pounds to be inflated away at up to 5, 5.5 percent,
which means that up to 3 percent, or maybe even more,
of the entire national debt of over 1 trillion pounds,
3 percent of it has been inflated away,
without repaying a single penny. What a stroke of genius
for the government, at the expense, of course, of all those
that have been frightened of stocks and shares, and frightened of buying gold and
frightened
of the future and have bought British government
bonds at a fixed rate of low-interest because they just felt it would help them
to sleep at night.
Well, it's helped the British government sleep at night as well. So, we live in a
strange world where,
actually, we are seeing fundamental stimulus
in all kinds of places, which eventually will produce a higher rate of inflation
than we have seen
perhaps, for five, six, seven or eight years in many different parts of the
world.
Just look what's happened in the U.S. the U.S. using
clicks on an Excel spreadsheet, mouse clicks and that's all you need to do to
create
up to eighty-five billion dollars of new currency
every single month, and that's just been reduced
as the tapering has been happening of quantitative easing,
that's been reduced to, only, sixty-five
billion dollars of new currency every month, effectively coming into the
economy,
through different means, manipulations, buying this, offsetting that, and so on.
The British government has already printed enough pounds, using
electronic tricks,
and distributed them around the economy, enough pounds to buy
one-third of our entire national debt and the process
doesn't look like halting fundamentally,
you can expect that if there was a further crisis there will be new stimulus and so
on.
The European Union, the European Central Bank is under pressure to do the same,
but has been held back by, all kinds of
concerns. Realistic, justifed, concerns,
particularly in Germany, who have a fiercely sharp memory
of the disastrous years of a Weimar Republic
in the 1920's when, we had hyper-inflation
as a result of the German government printing huge numbers of
marks. Why was that? In order to repay debt
that was imposed, in a settlement at the end of the First World War.
As a result of that hyperinflation every family in Germany has memories of
Grandpa
wheeling wheelbarrows of cash to go and buy a loaf of bread.
And by the time he got there, the bread was worth so much more that,
he needed 2 or 3 wheelbarrows of cash to buy the same loaf of bread.
And that chaos created the climate
for, many believe the rise of Fascism, and,
later, created the seeds of disconsent,
discontent, which led to a second global conflict: the Second World War.
Now, while we can discuss the exact mechanisms and relationships
between
different historical events, the fact is,
that hyperinflation remains a traumatic thought
in the minds of the German people in particular,
and they will point to more recent examples of Zimbabwe which had 1 billion
percent inflation as a result of
printing money and so on. Those are the reasons why,
the European Central Bank is under pressure not
to print large amounts of Euros but to be extremely prudent
and responsible. And, why it is
that the British and American experiments in printing all these
dollars and pounds
has been considered so financially irresponsible and perverse.
But we'll see how this plays out. I would say,
on balance, over the next 5 to 10 years,
we are far more likely to see inflationary pressures around the world
than deflationary ones, we may have periods of deflation
but governments will move heaven and earth to try and shorten those periods
to the smallest possible period of time.
And, Inflation, what does that mean? It means that those who hold assets
do well, physical assets do well, those that hold cash
on the whole will do badly because it will be difficult in that kind of
environment
to get enough interest to cover all the
deflating effects of the value of the money that you hold.
And that's been the situation, in fact,
to some degree over the last few years
in countries like the UK, where interest rates have effectively fallen to zero for savers
or very near to that, while inflation as I say has been running at 1,2,3,4,5
percent. And that means in real terms
the value of people's cash has been going down and it's been very difficult
for people to protect their wealth. And that has been a kind of tax and involuntary tax
on people who've got wealth and an involuntary benefit
to those who've got huge debt. Because those with a huge debt
have been paying very little for it and their debts have been wiped out
just like the British government's debts have been wiped out
by this strange environment.