Once again I am taken back to my youth and my fathers wise words that extremism breeds extremism. This leads me to follow on from my recent piece about deflation, bond yields and equity markets. During my morning snooze I found myself contemplating my existence and pondered how true it is that extremism breeds extremism and we all know how markets like to push for extremes.....
As often happens I wake up and I have a trade idea in my mind and in this case it was selling GBPUSD and it occurred a few days ago (no jokes). I may return to that in a later post. Digging deep into my subconscience I believe the idea was linked to an FT article that I had been reading on the train home some weeks ago about how large the state is now as a national employer. Thats right, unbridled capitalism got us into this mess but now we are left with a huge proportion of the workforce dependent on the state..... The UK is a socialist state.
Now, we also know that over the last few decades the shift in power from workers to corporations has accelerated towards the corporation. This has led to concepts such as outsourcing and as a result stagnant to lower wages with only the chosen few milking the system at the expense of the rest. As with all things, I believe we are simply in a perpetual cycle and now is the time for a swing back to power to workers and away from the corporation. In economics we would say from capital back to labour.
So what we know is that the state is being choked by it's own debt with more to come, it is also the largest employer in the country and it is likely that we get a swing in power back to workers (I don't wish to use the word labour as it may be confused with the political morons that are in power). So under these circumstances, which is more likely to manifest itself, inflation or defaltion? Ask yourself who gains the most if deflation sets in. Number one on the list of those who gain would be the state. As yields fall on government debt and in time that debt is rolled over at lower coupons, the amount of tax income that is used to service the debt holders is reduced and so more can be ploughed back into the economy. Secondly the most astute consumers who have not taken on any debt will also gain as should be the case, those that were not greedy and did not take part in the madness should be rewarded. Does the state favour an inflationary scenario or a deflationary one?
So for all the talk of inflation versus deflation, just ask yourself who gains in each scenario and who is the country's biggest employer. The power shift back to workers is coming and with it so will deflation. In time, as we know only too well, extremism leads to extremism and so a swing from deflation to perhaps hyperinflation may come some day, but give it a rest for now, we are nowhere near having to worry about inflation.
very well researched piece of information. regular follower of the blog.
ReplyDeletemost would consider that a large debtor prefers inflation as that reduces the value of the debt outstanding. this is not totally clear in the current case as you bring up a cross-current: that the state has become a very large employer. in this case, the state has an offsetting "asset". that asset is its future hours worked against which it has floating liabilities. that means it prefers in that case deflation -- i.e., lower future wages.
ReplyDeletei think the idea of figuring out who benefits is a good one. but i suspect the state prefers inflation. so far, in the u.s., they are playing that hand.
Point taken. My big picture arguement is simply that irrespective of what the state wants defaltion is a natural process, a restorer of equilibrium if you like. Take a look at Japan, no matter what was tried by the authorities to stoke inflation, nothing worked. As mentioned above hyperrinflation may come some day, but in the meantime you cannot force people to borrow and consume. Take a look at Richard Koo's book if you have not already read it. Inflation suits those that have a lot of debt but in the near term say over the next 5-10 years I doubt we get it. In that case we are arguing that consumers can leverage themselves up to the eyeballs and then inflation will take care of the mess. This is a ludicrous arguement and one that ignores the natural process of cycles and equilibrium.
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