Preparing for inflation

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 As I have said in an earlier blog I have been to your fair country many times.  On my latest trip I find myself sat at JFK waiting for my flight home and listening to the bar room economics of a few guys who have had a few beers.

My own knowledge of economics is restricted to what I learned in school and 30 years of seeing politicians ignore the lessons from the past.  The recent economic problems are a case in point.  Gordon Brown, the last Prime Minister once said that the years of boom and bust were over.  We had entered a period of sustained economic growth.  This is the same man who is credited with saving the world’s economies by his prompt action in 2008.

One of the things I have never understood from my school boy economics, is where did the money go?

Yes we know that the banks lent foolishly to people who could not repay, but when the borrower received the money what did they do with it?  One thing for sure they didn’t burn it.  They used it to buy property, the money passed to someone else.  What did they do with it?  They didn’t burn it either.  They bought things, paid off debts, they passed the money on to someone else.  This process of passing the money on never stops.

At some point the money is deposited in the bank.    In the banks books this is recorded as a liability.  Magically they have converted an asset, the loan, into a liability.  And they believe they have the right to tell small business how to run their business.

The point is the money hasn’t vanished from the economy.  

So when the government brought in their quantative easing policy and bought the bad bets from the banks they are adding money into the economy.  More money but no increase in goods and services means that more money is chasing the same level of activity.  Supply and demand says that the price of the goods and services must rise, i.e. inflation.

For those of you that are scratching your heads I would refer you to the 1970’s.  After the gulf oil crisis the UK government started printing money.  By the mid 1970’s inflation was rising and by the end of the 1970’s it was 25% pa.

So what should we be saying to clients, I would say invest in goods.  A client I had at that time would buy hundreds of trucks before he needed them because he knew that they would cost more in the future.  Borrow and invest if you can because rates today are low and inflation destroys the value of what you owe.

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