Thursday 20 September 2007

Inflation on its way


The price of oil hit $83 today; A record high yet again. To all those who think rates have peaked and are on their way down, think again!

Even as the Dollar falls the real price increase is relentless. In the UK a litre of petrol will soon be over £1; a frightening prospect for motorists.

High inflation during a slowdown will be very painful economically if it happens. All this is forgotten in the midst of the credit crunch.

Some of the price is hedge fund speculation though; let's hope that unwinds.

24 comments:

Steven_L said...

I've been trying to argue this with Redwood on his blog for the last few months. He never gives a straight answer on oil and inflation. He just seems obsessed with making interest rates lower.

I still want to buy a V8 Audi before it's too late.

Nick Drew said...

Steven - good man! nice motor

yes, Redwood is an odd cove, isn't he - an early advocate of flooding the market with (cheap) liquidity. Not such a monetarist after all?

Anonymous said...

Oil isn't rising - its the dollar thats falling relative to commodities due to massive over-inflation of the money supply over a number of years. Buying gold is starting to look like a better and better option.

The US has obviously given up on its currency in order to re-inflate the economy and try to minimise the impact of a recession. I don't think it will work. You actually need people willing to take up the opportunity for more debt and that is exactly what is not happening. No big surprise that the Dow's exuberance
after a big rate cut was rather short lived.

We will see the same problems here. We will be forced to cut interest rates - but it won't work because credit is now a dirty word. The currency will fall to get back in-line with the dollar. Thus commodity prices will surge, inflation will surge, wage demands will rise, unemployment will rise, homes will be repossessed etc etc etc. The party's over.

tory boys never grow up said...

Probably depends on your view as to what causes inflation - but that is a very old and boring debate. How much evidence do you monetarists need before you give up?

A more interesting point is in respect of your latter point about hedge funds yet again distoring the market. Isn't it about time something is done about this. Strengthening the accounting regulations so the sponsors are required to consolidate exposures that they may end up funding would be a good start. Or perhaps imposing regulatory capital requirements on stand alone funds, or increasing the requirements for those funding unregulated funds might be a good start.

Nick Drew said...

TB - I think the hedge fund issue will take care of itself, because the immense leverage they have mustered in the past is unlikely to be available to them now.

Frankly, if pure speculative equity is going into commodities, (a) I'd applaud it as being a source of liquidity at worst, and rational allocation of resources at best; (b) it will be mostly if not all in futures: speculators don't buy spot oil (though maybe gold ...)

Anonymous said...

I think the interesting question here is where does the Fed go next? The cut of 0.5% hasn't really juiced up the Dow because it won't help price the risk in the markets which is what is holding up liquidity flows. Nor will it be enough to help sup-prime mortgage holders with adjustable rates that are about to be reset. To help these guys the Fed would need to reduce rates to about 1% within the next 6 months! You have to imagine that this is actually what they have in mind. Slashing interest rates like crazy to head off a housing crash induced recession. What do you think guys?

Sackerson said...

Anon: the US response to the subprime fallout demonstrated, I think, that the authorities fear deflation more than inflation. They've shown their hand. It's like that film where the bus can't drop below 50 mph. But that was Hollywood - anybody have an idea how to engineer a happy ending for this script?

Anonymous said...

"a frightening prospect for motorists" ...

And for clunker hopefully :-) - the more people get pissed off with the dwindling pound in their pocket the better. Before he tags the lot of us and puts us to work in the Gulag

Anonymous said...

" still want to buy a V8 Audi before it's too late."

Just don't tailgate me in it (why is it Beamers, Audis, Mercs and Vauxhall Astras that comprise 99% of the tailgating company?), as I will slow way way down. You may be in a hurry. I'm not. And I am also 6'6" and prone to acts of viloence against suchlike ;->

Mark Wadsworth said...

Slashing interest rates like crazy to head off a housing crash induced recession. What do you think guys?

This is exactly what they will do - governments are going to need all the inflation they can get away with to mask real fall in house prices.

It is completely fucking nuts, ye olde central banks have finally twigged that house prices are roughly double what they should be, and so they are going to fuck up the whole economy and everything just to help politicians save face.

CityUnslicker said...

I agree that this entire mess has been created by means of fueling politicians vanity.

Anonymous said...

Anyone care to hazard a guess as to when Gordo will bugger up the Index-Linked Gilts market by attempting to change the definition of the inflation for which they are meant to compensate?

Sackerson said...

Dearieme: good point. In fact, it's such a good point that HMG felt they had to address it with a "Personal Inflation Calculator":

http://www.statistics.gov.uk/pic/

One way to tackle it is to buy lots of the stuff you normally use, if you think it'll get more expensive.

For the better-heeled among the readers of this blog, does any of you know whether it's possible to pre-pay several years' worth of school fees? Even a 5% p.a. compounded discount would likely be a better investment than net interest on savings accounts.

tory boys never grow up said...

ND - I think the hedge fund issue will take care of itself, because the immense leverage they have mustered in the past is unlikely to be available to them now.

I hope you are right but history (the ERM, LTCM and sub prime) and the greed of many who work in financial markets tells me that this is unlikely. Probably better that we have some decent well thought out regulation rather than panic measures however.

Anonymous said...

"whether it's possible to pre-pay several years' worth of school fees?": it used to be that some schools offered such a deal. What happened if the little dears didn't then attend the selected school, I've no idea. (We funded through the excellent device of a flexible mortgage.)
Anyway, on reflection, we're going to install a proper ladder to our attic and then stock up on tinned food. We're lacking inspiration, though. After sardines, corned beef, cassoulet, pears, lychees, baked beans and tomatoes, what else? Jars of tahini, perhaps? Tins of chick peas? Also considering buying a juicer and making our own cider. Golly, won't retirement be exciting?

Anonymous said...

Oh, and when we change cars, I may go for home-made diesel.

Nick Drew said...

whether it's possible to pre-pay several years' worth of school fees?

Depends on the flexibility of the school. At the establishment attended by Miss Drew, one enterprising parent offered the Head an Aston Martin up front (in lieu of fees), which he accepted !

Seriously, the usual risk-management considerations apply:

- who has the lower cost of capital?
- who has the lower discount rate? (most individuals have no view on this)
- is the school a good credit risk?
- can you get a watertight contract, ensuring no backtracking by the school? (Mr Aston Martin was a man of his word !)

(PS but this is not investment advice it is purely academic & conceptual rambling)

Nick Drew said...

TB - yup, can't disagree with well thought-out regulation

detail is everything !

CityUnslicker said...

I have only yesterday been looking at what school fees will be and am now suitably mortified. So much for moving house or paying off the mortgage!

Old BE said...

School fees have gone up in line with house prices haven't they? As more people fund their spending with equity release mortgages...

On this doom and gloom lark I am no economist but isn't a bout of inflation infinitely preferable to a bout of deflation? Real incomes and asset prices may fall but they won't sink forever a la Japan.

And surely the slowdown won't be any worse than the 70s? No-one died from food shortages did they? Surely talk of stockpiling is just paranoid...

Sackerson said...

Ed (3 pm): the authorities agree with you that inflation is preferable to deflation. But I have more than once recently read what seem to be well-informed commentators who look back well past the 70s to the Thirties, and they say the debt situation is worse now than it was then. no-one is certain whether we'll get inflation first, then deflation, or the other way round. But no-one seems to think this current nonsense can go on forever. I'm just hoping for some more time to build a security package of some kind.

Anonymous said...

In the 30s we had a credit boom that was followed by central banks tightening money supply as they realised that the boom was caused by lax credit. This boom followed by a particularly severe bust was a disaster - the raising of interest rates put many hardworking people out of their homes as interest rates rose and loans on investments became very expensive. Farmers suffered. Big corporations suffered as the US consumer found itself without any money.

It is now understood that in such situations it is actually preferable to inflate the economy. The simplest way to do this would be to just print cash. Obviously if you do this then todays mountain of debt becomes a molehill of debt. But inflation rages, the currency slides. It is a technical default on existing debts. So, therefore, who will suffer most? The creditors - China and the OPEC countries. But the West will not escape scot-free - lessons will be learnt. The moral hazard of a monumental bail-out by hyper-inflation at the expense of the prudent will have long-term consequences.

Of course, if the rumours are right that OPEC oil will run out within 15 years they may discover that they have squandered all their wealth. What price a holiday in Dubai with oil at $200 a barrel?

Interesting years ahead, I think...

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