Star Trek Economics

I heard some quietly chilling news on the radio while driving into work this morning and have just got in to find that Guido has already written an excellent post on the subject of deflation or, to be more precise, inflation. Yup, as predicted on the more sensible financial blogs for months now, the latter's on the rise again. Be warned, however, this is just the beginning.

As Scottie would say on the Starship Enterprise to a captain screaming for Warp 12, "I canna' break the laws of physics, Cap'ain!" In this case, the chief engineer of the Starship Britain is Mervyn King (Alistair Darling is just the helmsman); its utterly reckless captain, who managed to navigate the ship straight into an economic black hole, is Brown (naturally); and the laws of physics are, unsurprisingly, the laws of economics which, by the same token, "canna' be broken."

You print money, you devalue it. You print bucketloads of it and, well, you are courting calamity. You go into massive debt, with a huge structural deficit bolted on, and you compound that potential devaluation and turn a calamity into a catastrophe. Simple as. They will tell you that it's the oil prices, that the money is still sound. They aren't just being dishonest, I'm beginning to wonder if they (these economics 'experts') actually know what the hell they are talking about. The temptation is to trust them - they're the boffins, after all - but the economic forces at work here are so powerful that, you know what, they might not have a clue. Either way, it will be very hard for the next (I hope sensible) captain to pull us out of the gravity vortex Brown has steered us into without stripping the vessel of all its masses of dead weight first, and then by reigniting the engines with the fresh plasma that is tax cuts and other incentives for wealth creation.

Fortunately, David Cameron wrote an excellent piece for the Times this morning which outlined those very things. If only he'd reconsider the 50% tax, too. It wouldn't signal a warp speed recovery, but it might send a vital message to wealth creators and investors that they won't be punished just for being successful and simply for doing what they do best: making money and then spending it.

Here's Guido's thoughts just in case you can't be bothered to click through:

Guido was more than sceptical when politicians and Labour luvvie economists like Gavyn Davis started talking up the bogeyman of deflation at the same time as the government was running up massive fiscal deficits. It seemed too handy a coincidence that they would print money on a scale never seen before at the same time as issuing debt on a scale never seen before. They subsequently, coincidentally, bought the debt using the money they had just printed.

This we were told was to stave off deflation which it was emphasised was very bad. Goods becoming less expensive was somehow worse than goods becoming more expensive. If we got deflation it would be the end of the good times for ever according to even monetarist economists. Guido was sceptical that deflation was necessarily bad, history shows that there have been times of increasing prosperity that coincided with deflation. Deflation happened several times in the nineteenth century. During that era of rapid economic development there were no central banks and money was calculated as a certain quantity of gold or silver.

Deflation was not necessarily a threat to our prosperity, in a situation where the money supply is stable it is the manifestation of prosperity and pensioners know that their standard of living would have improved. With inflation now upticking this experiment in Mugabenomics* has to be reversed without setting off hyper-inflation or collapsing the government debt market. The policy authorities have figured out how to prop up the gilt market – they are changing the regulations to force banks to buy government debt to the tune of hundreds of billions. It remains to be seen if they can avoid an inflationary catastrophe, surging record gold prices suggest the markets suspect not…

*©Vince Cable, who was against QE before he was in favour of it. God knows what he thinks now.

I have an idea: let's make Guido chancellor. At least he seems to know what he's talking about.

The Deflation Myth

Deflation, as demon, is a myth. At the very worst, it is a natural but potentially very painful bursting of a bubble, itself a metaphor for that desperately dangerous illusion that is fake growth. But the real danger is inflation, as this truly great economist reminds us.

I wonder if Brown, the man who really has put Britain on the road to serfdom after that terrible decade of his Chancellorship, which saw him deliberately overheat the economy, itself enabled by his precipitate deregulation of the banking industry, while he also indulged in politically motivated deficit-spending, has ever even bothered to read him. I very much doubt it. And if he has, it's clear Brown had no interest in comprehending him, even if he could.

It's certainly the case that St John of Deficit (Keynes), darling of the Left but totally misunderstood by them, would agree with Hayek, not Brown, on how to deal with the current slump which Brown, an economic illiterate, helped enormously to create. Printing money, route one to the creation of an inflationary timebomb, is not the answer. Facing reality and cutting back intelligently is.

I hate to think what Hayek himself would have to say about Brown's current, suicidal expansionism. It would be polite, but it would not be kind!

Double Dippers

As the Spectator reveals the growing rift between the governor of the Bank of England and Brown, the latter, according to the Financial Times, having been left 'fuming' at the former's 'gloomy' (honest?) predictions for the UK economy, the reality of the deep political cynicism of Labour in their plans to dupe the electorate into a false choice between Labour 'optimism' and Tory 'austerity' begins to sink in.

Given this Government's track record on forecasts, as well as some of the worrying indicators coming out at the moment - not least the Standard & Poor revelation - I don't think it's too unreasonable for King to take a sober view of things. In which case, this becomes a telling sign of how Gordo likes his independent bodies: erm, toeing the Labour party line, and helping in the great struggle against the Tories. And it's rather dispiriting if he's letting these party poltical instincts damage relations with the Bank of England at a time of economic crisis.

So once we strip away Labour's lies and spin, what is the most likely direction of this, the worst recession in British peacetime history? What is it that Brown and his acolytes would like us not to know?

Brief research on some boffin economist websites reveals the most likely outcome in all its stark truth: a so-called double dip recession. Over to them:

Total GDP contraction to date now stands at -4% on a quarter on quarter basis...Whilst a bounce back in the economy is expected going into the 2010 election, however the tax hikes and spending cuts will in all likelihood trigger a double dip recession during 2011 to 2012 as illustrated by the above graph [top of page].

What this means is that there will continue to be a major shortfall in tax revenues and therefore continuing budget deficits and hence deeper public spending cuts and therefore continuing downward pressure on prices and hence inflation may remain subdued even beyond 2010 after a temporary rise inline with the bounce in GDP.

UK Inflation Conclusion - Extreme Deflation as measured by RPI is near an imminent end, forward inflation will remain subdued despite economic recovery into the 2010, election as the risks of a double dip recession remain which would be accompanied by lower inflation.

Economist Robert Shiller, favoured by George Osborne, agrees. The Spectator again:

As for the Tories, their rhetoric may be about to get even more cheerless. One of George Osborne's favourite economists (whom he referenced here) warned today that Britain could face two recessions in quick succession. Seems like gloomy ol' King may be onto something...

It's vitally important that the Tories reveal the extent to which Brown's continued reckless overspending during a severe debt crisis will cause not recovery, but a brief respite in early 2010 - which was always his cynical plan - followed by another serious recession, leaving an entire generation exposed to negative growth and all its attendant personal, social and national pain. The only way to head off this desperate threat is for Brown to be ousted as soon as possible and his appalling, short-sighted and duplicitous, politically motivated programme to be torn-up and replaced with a new one that's genuinely designed to fix the problem now.

The Tories have to be honest with the people of Britain and warn them that Brown's short-termist economic insanity could lead to catastrophe for the British economy. The people must be convinced they cannot believe a word he says and the Tories must seek to force him out, preferably this summer, in the hope that the severe damage he has done can be confined to a single period of recession instead of the dreaded - and now eminently likely - 'double dipper', 'W'-shaped 'lost decade'. It will go much harder for us because in the absence of a Japanese-style manufacturing capacity to prop-up the deficit, the only thing Britain will be producing for the forseeable future is debt. Among OECD nations, that would be historically unprecedented - and utterly humiliating.

If you doubt the dishonesty of Brown and his glovepuppet, Darling, just remember the forecast downgrades (see below) between November 2008 and April 2009. They weren't just 'off-beam', they were lies. They're doing it again with the UK bank stress tests. We can't come through this without facing-up to reality, something the current regime ruining Britain is psychologically and morally incapable of doing. Until we are shot of them, no recovery will be possible and years of pain are almost guaranteed.