Clem Chambers: Short answer is the right one for keeping up with inflation

“Everything in the market is now driven by politics and not, as is usually the case, by economics”

It’s really hard to be bullish at the moment. The developed world is entering austerity en masse. The West has maxed out its credit and is now bloated with overheads it can no longer afford. The ultimate financial bubble has turned out to be government itself. Now that bubble is bursting.

Depending on your political world view, this may amount to good news in the long run. Yet it’s bad news in the short run for all, as the world’s largest economies try to rebalance – back to the private, wealth-creating sector and away from the resource-consuming public sector, which manages only to re-distribute wealth, rather than create it. What’s certain is that it’s going to be painful.

Ten years ago at the end of the “deregulation and the technology-fuelled” boom it was often said that the governments of the West and their central banks had cracked economics; or as Gordon Brown famously stated, they had ended the boom/bust cycle.

Now that dream is in tatters, as countries that looked so prosperous are crushed under mountains of debt while they vainly struggle to stave off an inevitable financial reckoning with ever more convoluted, financial manipulations.

The outcome has two potential paths. The first – always the final denouement of this kind of sea-change – is the sort of social economic restructuring we saw in the 1980s under Thatcher and in the 1990s in Russia.

The other route is a long agony of fighting off the inevitable, the established order inflicting increasingly desperate measures to maintain the status quo. In a sense this was the story of the 1970s in the UK.

Not so long ago in this column I put forward the thesis we were re-living the 1970s again. Now it seems to me we are repeating the final years of that cycle – where economic, social and financial chaos will build to a crescendo. It’s the final lap before a major change.

Everything in the market is now driven by politics and not, as is usually the case, by economics. This is a terribly precarious position for any economy to be in. Accordingly, it’s hard to know how to invest accordingly.

I have been doing a fair amount of comment for television news recently. One of the economics editors recently asked me how to make money from the turmoil. My answer was “short paper money”.

Shorting is selling what you don’t have in order to buy it back cheaper later. You can do this with a share, a commodity, pretty much any financial instrument if you want.

Shorting money is, however, a slightly off-beat idea. Buying gold is akin to shorting money because it is essentially swapping your paper money for something else. Yet to really short money you have to sell money you don’t have, akin to borrowing to buy assets.

This is essentially a bet on strong inflation and a continuation of suppressed interest rates. Sounds scary, and it is. However it is in effect what every British person does when they get a fat mortgage and buy a house.

I’m convinced inflation will be with us for a decade. At the end of that period inflation will have changed prices beyond recognition – much in the way it did between 1969 and 1979. It’s hard to beat a 5 to 8 per cent inflation rate in a recessionary environment.

Shorting money by buying a long-term asset is certainly an option for keeping up with it.

• Clem Chambers is chief executive of stocks and shares website ADVFN.com and author of 101 Ways to Pick Stock Market Winners.