In the Eye of the Storm

House prices are once again on the rise. London has seen the fastest increases to date with money slowly filtering out towards the rest of the country. Mark Carney, the Bank of England Governor, pays empty lip service to interest rate rises. Even if they were to go up tomorrow the damage is already done. It was done when they bailed out everyone, slashed rates and embarked onwards with Quantitative Easing. Raise interest rates tomorrow and we would be back where we started only worse. However history shows that central banks are always reluctant to raise their rates in a timely manner, even when they are raised they stagger it over months and it then takes months or years for the broader economy to feel the restriction of credit once more and fall back into a recession.

The 21st Century will view the central planning of money as an absolute disaster and free market alternatives will replace the current defunct system, good money always drives out bad and Government money is never good. Many Central Banks are using their faulty inflation rates as guidance as to when interest rates should rise but their metrics are critically flawed. 

Inflation is not just the price of staple goods such as milk, televisions, cheese or oil. If the price of the stock market rises that's inflation. If house prices rise that is inflation. If Gold rises that is inflation. If the price of a Picasso masterpiece rises, its inflation. If we take these items into account, the hard assets, then inflation is rising at increasingly faster rates. Its important to understand that the prices of these items are inflation the Central Banks just choose to ignore them in their indexes.

Another problem facing the planners is that interest rates can't rise or at least not by much. Many Governments don't want them to rise as it impacts on their already woeful deficits. It would hurt their tax receipts. It would ruin the "feel good" feeling in the run up to the UK election. People are beginning to stretch themselves once more and pile up debt on the low rates that are currently on offer. Mark Carney blames everything but loose monetary policy the real fuel to the fire that sparks off an asset price bubble. The same reasons that were cited during the previous boom are once more trumpeted to causing the recent house price rises:

• Too much Demand
• Too little Supply
• Not enough building

The real reason is excess credit. Its loose monetary policies that are causing house prices to rise once more. Demand and supply dynamics have changed no more than back in 2009, the difference is Central Banks have turned on the taps once more to release more credit and banks are once more recklessly lending to anyone with a pulse. Same with Gold. Same with art collectables or with vintage cars, the free market can not produce hard assets to keep up with inflation. Electronics and consumer goods hide real inflation as capitalism does such a wonderful job of providing these services in ever greater quantities at lower prices. We are not building more land. Houses are getting built but its the land they sit on that causes them to rise in value. 

So we are in the eye of the storm and if I'm a betting man it will go on for a few years at least. "Get it on tick" is once more a way of life for people. Once the tanker moves in one direction it generally holds course for longer then people can call it. When will the crash come? No one knows. What format will it take? Again no one can say for sure. All we do know is that the fundamentals are progressively deteriorating. When the 2000 stock market bubble popped the central banks re-leveraged the system, cranking down interest rates to low levels. Then 2007 and interest rates went to zero and monetisation actions were also taken. So once interest rates rise (if they do) then once more they will see-saw back to zero but it will be very hard to get credit moving with all the extra problems. Again monetisation of debt will happen, this time will see even more draconian manoeuvres. We could get "Bail-ins", similar to a Cyprus situation where money is simple taken from the wealthiest account holders (or even across the board) to try and bail out the system; a direct attack on freedom. One thing is for sure, it won't be pretty and it won't be moral.

The asset price bubble is global. This pod-cast with Krassimir Petrov highlights Asias problems and how it is creating reckless bubbles. House prices are rising there even faster than the UK, yet no doubt the same reasons are given, limited supply, too much demand not enough new builds and so forth. As mentioned near the end of the pod-cast central banking really does change the morality of people for the worse. Excessive credit does great harm to us all.

Vote for Gordon

"Deflationary policy is costly for the treasury and unpopular with the masses. But inflationary policy is a boon for the treasury and very popular with the ignorant. Practically, the danger of deflation is but slight and the danger of inflation tremendous."
Ludwig Von Mises, Human Action

The prospect of a hung parliament. The prospect of a Labour victory. The prospect of divided politics once more. With the British polls showing a narrowing between the Tories and Labour, markets have begun to get the UK jitters once more. David Camerons indecivness on issues such as the deficit and the inflationist policies of the current Government have casted doubts in the British peoples minds. With so many of the populace aboard the Government Gravy train, do we really want cuts? Maybe the government can inflate their way out of this mess resulting in us all obtaining our free lunch, living in endless prosperity? I'm afraid the laws of economics are the same as the laws of gravity. It doesn't matter which way you jump off a cliff, or in this case how the government chooses to inflate, the end result is the same, just like gravity pulling you towards the earth the free market demands the required correction. All the government can do is lower our standards of living for the long term. The more it fights the free market, the worse the end correction will be.

Vote for Gordon may seem like an odd title, as Gordon Brown and the Labour party are carrying out the worst policies listed above, a contarian view if you may. It's important for me to state that I have no political affliation. All parties are as clear as mud, all with agendas to infringe on peoples liberties, distorting markets and impovishing people. Get rid of Government I say, but that is seperate topic for discussion. We need Labour to win the next election. We need another term to discredit statist policies. I fear if the Conservatives win, the UK will be in serious problems.

If, as the Conservatives say, they will cut spending as should happen, this will spark off a further deflationary collapse. This is the required medicine, however the majority will not see it this way. As Ludwig Von Misses states above, "...inflationary policy is a boon for the treasury and very popular with the ignorant". Another quote that has stood the test of time. Recently it has been stated in the news that the UK may not need to borrow as much as initially forecast. 'Economists' talk about the recovery, people say the recession is not that bad, the malinvestments are proped up providing the illusion that its business as usual, all of course are the product of an inflationary mirage. Governments have convinced themselves that all we need to do is drive down interest rates as low as possible and print money to fix our problems. We can avoid the required adjustments by simply trying to continue consuming and borrowing, the exact measures that created the problems.

People have very short term memories and short term outlooks which I have witnessed throughout my life. For example people always state what a disaster Thatcherism was, as they looked at the short term effects, high unemployment, less government support for individuals, the acceleration of industrial decline. Over the long term of course, it was for the benefit of Britain, my generation are all Thatchers children. We all benefit from goods that we used to make, that are now made in China at a lower cost. We have all moved into other areas of employment, better jobs in many cases.

Its peoples short term memory that is dangerous. If the conservatives win at the next election, will the squeeze provoke the public to turn to the left? "We were doing fine under Brown before he left?" - remember "people say the recession is not that bad", the required corrections would be painful. There is so much imbalance, I don't think the Tories could correct the mess in one term. I also think they don't have the spine or the conviction to go through with the required medicine. The temptation to eventually inflate after initial cuts will be too great, the short term benefits will give the government room for manove. This in turn would confuse the people, believing that cuts are the last thing we need, we need further Government action to solve the issues. A resurgance of left wing politics once more could take place. The free market will be blamed once more for the problems.

However if Brown were to win a second term, cuts would not be on the agenda nearly as much. Further inflationist policies will be carried out as the Government spends its way to popularity. The market would not tolerate this, instead capital would flee, interest rates would rise, currency instability or a full blown currency crisis would occur. Its better that this happens on Labours watch rather than the Tories. People would have a clearer picture of what caused the mess - continued Government intervention - "We need the free market to solve our issues, no matter what the cost".

You see the Tories are a classic scapegoat, they generally tell people the truth, that we need disipline. Labour are the weak parent, who give in to their children and let them run riot. We need labour to continue in power so that the Tories can say "Told you so". The end game is a deflationay collapse, hard times?, sure but good for the moral character. The only other alternative is the quote at the top of the blog, monetary collapse.

How likely is Hyperinflation?

It's a topic that comes up in various articles, with authors proclaiming its just around the corner, weeks or months away. Truth is Hyperinflation will happen if we as a nation wish it to happen, which is exactly the path we are walking towards. An excellent article has been published by Dr. Krassimir Petrov detailing the road to hyperinflation. It is only a road and at any point we are free to turn off it, but only if we wish to do so. Vote for Brown, it will build the moral fibre we need to avert such a situation and as Dr. Krassimir Petrov points out, buy some Gold in the meantime.