Never has so much money been artificially created – in the old days printing presses would run, money would flood into an economy and inflation would take off generating a vicious circle. In essence this is political policy, writes Clem Chambers
Inflation flattens debts and certain parts of society; it is a levelling weapon and this is why modern societies fear it.
Its purpose has always been clear, a way for governments, be they Ancient Roman or modern European, to get around their debts.
A little inflation is good, as it creates pressure for an economy to move forward. It shifts resources to the young and to the risk-takers. It puts a country on “the front foot,” so long as it doesn’t run away. Even during the extreme inflation of the 1920s, Germany was almost unique in its high levels of employment, even while their society melted under the firestorm of the devaluing mark.
The key is keeping inflation under control and “creeping”.
The fear of creating inflation is simply that controlling it may prove not just difficult but impossible.
This is the peril that Europe and the US find themselves in; reflating their economies for the umpteenth time without the genie of runaway inflation bursting out in an unexpected location.
The law of “unintended consequences” is a cliché of our time, because we are presently in uncharted waters where dramatic actions are needed but, by their implications, only sketchily understood.
The unintended consequences of global quantitative easing (QE) are unknown, and right now the first outcomes of this giant reflation are hitting the real economies of the US and UK. The market is rallying because QE is escaping from the closed lock of central banks recapitalising banks so they can lend the state more money to fill budget deficits. This has led to new money is hitting the stock market.
Is this good news or is it bad news?
On the face of it is an excellent development; the rally means the double dip is over. The speculators that make money in financial disasters, driven by inflation, are really the only people with capital trying to hide it from the privations of devaluation by investing in companies with international exposure with tangible assets.
This rally could, therefore, be predicting recovery or impending disaster.
I do not have to keep predicting inflation as it’s been here for a long time now. The question is, will it be controlled during this recovery or will it explode?
If it looks set to explode, investors should go short money, which is to load up on fixed rate debt. If inflation is controlled, it will merely mean better times are ahead and equities will be a good place to be.
We are entering a new cycle and the emergent era is hard to predict, but it seems highly likely we are finally on our way out of this long recession. This optimism should be heavily tempered with a realisation that, to paraphrase Harold Wilson, “a pound in your pocket today” may not be the same next year as it is today.
• Clem Chambers is the chief executive of stocks and shares website: click here to visit www.advfn.com