When Lord Horatio Nelson wanted to ignore a warning about ships about to attack his fleet he cunningly put his telescope to his blind eye and declared that he could see no ships. As the admiral of the British fleet some 200 years ago nobody dared to contradict him.
A similar trick is being performed by statisticians who tell us there is no inflation after five years of reckless money printing. Prices of essentials like energy and healthcare are sharply up but the official statisticians contrive to keep them out of the inflation index.
But this sort of illusion does not last forever. Eventually the ships are all around you and firing their cannons! Inflation is already in the can.
The head of the British supermarket chain Waitrose says food prices are heading for at least five per cent inflation this year due to bad harvests and crop failures around the world. That’s going to be tough on people paying higher taxes and possibly earning less.
Oil prices remain resolutely high and a price spike can be easily envisaged. Last week’s awful terrorist attack on a gas plant in Algeria is a reminder that a lot of the world’s energy supplies come from unstable countries in the Middle East and North Africa.
However, what nobody likes to admit and still fewer seem to understand is that the real reason for most price inflation has nothing to do with supply and demand of commodities but is down to the increasing supply of money. Global central banks have been pumping money into the world economy for five years at record levels.
Action and reaction
To take another analogy. This is like pulling and pulling on a string tied to a brick. Nothing happens for ages and just when you think it never will then the brick flies up and hits you in the face.
Money printing is like that. Central banks can print the stuff but they can’t force people to spend it. The first reaction of people who get this money is to save it in case of another crisis. So there is no inflation of price levels. However, just as they start to think the crisis is over the spending starts.
Inflation is the inevitable result and central banks can do nothing about it because the money is already in the system. They can try, of course, but the effect will be marginal against the incoming tidal wave of money. Is this where the global economy is going next?
Timing dear boy
Getting the timing spot-on is impossible on this. But it is pretty inevitable unless you put that telescope to your blind eye and pretend that all the money printing just has not happened and that central banks are not still cranking up the printing press.
Don’t look at what the new Japanese government is doing or what the Bank of England has already done. Forget that the Fed is buying 60 per cent of new US T-bonds. Ignore the stimulus the Chinese chucked into their economy for the leadership transition last year. Deny that the ECB’s Mario Draghi is buying up bonds.
Inflation, I see no inflation, but it is coming and investors need to be ready for it.
Posted on 19 January 2013 – ArabianMoney