The Bankwatch

Tracking the consumer evolution of financial services

Inflation will follow the recession and the law of untended conseqeunces

Something that has been niggling at me here and here is the law of unintended consequences.  The people architecting the financial stimuli today are first politicians and second relatively young living their maturity post the late 70’s early 80’s.

The key statement in this article is at the end, and it was quoted by Geithner today too – that this borrowing is temporary and will be repaid as soon as things are back to normal.  Please stand up if you know:

  1. when normal is expected to resume
  2. that we will be able to repay the debt at that time?  [ would the increase in tax to accomplish debt repayment send us back in a recession? ]

No, we have to accept that we will have high inflation, some equally tough times on the other side of the recession, and financial services must adapt (The Great Unwinding – my take on the future of banks).

Prices falling but inflation fears remain at fore

The US economy is expected to experience an overall fall in prices this year for the first time since 1955, the world is in the grip of a severe recession and the oil price is 70 per cent below its peaks of last year.

Click for full graphic

So what are investors currently worrying about? Why, inflation, of course.

xxxThe simple ecpnomic fact is that high borrowing will be followed by inflation.  Rationalsing otherwise falls in the same camp as rationalising a bubble housing market that its “different this time” and based on different fundamentals, or alternate economic policies.  Well no-one is arguing that house prices will maintain their value now….

Written by Colin Henderson

February 10, 2009 at 18:01

Posted in Uncategorized

Tagged with ,

2 Responses

Subscribe to comments with RSS.

  1. Why didn’t Japan see high inflation after their recession in the 90’s?

    Ken

    February 11, 2009 at 08:11

  2. Its a great question. One major difference is Japan is largely a creditor nation while US is the largest debtor nation.

    Japan experienced deflation. The difference afaik is that Japan did run a deficit economy. In fact a ‘carry trade’ developed with foreigners buying borrowing in yen at almost zero interest, then investing abroad at higher rates. That influenced the yen value too. Finally Japan was alone with its bubble – no global situation there.

    http://en.wikipedia.org/wiki/Japanese_asset_price_bubble

    http://www.doctorhousingbubble.com/japanese-asset-bubble-lessons-from-the-economic-asset-bubble-of-japan-the-heisei-boom-what-parallels-exist-between-the-japanese-asset-bubble-and-our-current-financial-environment/

    http://www.ucsc.edu/oncampus/currents/97-10-13/hutchison.htm

    Anyone else care to chip in?

    Colin

    February 11, 2009 at 09:03


Comments are closed.

%d bloggers like this: