UK Deflation Warning - Bank of England Economic Propaganda to Print and Inflate Debt
Economics / Inflation May 20, 2015 - 03:27 AM GMTBy: Nadeem_Walayat
DEFLATION! The mainstream broadcast press appears to have swallowed the Bank of England's deflation economic propaganda hook line and sinker as they regurgitate the dangers of deflation following release of UK CPI inflation for April of -0.1% prompting headline grabbing warnings of the dangers of falling prices, the dangers of debt not being eroded by inflation, the dangers of people not spending as they wait for prices to fall, the dangers of ... you get the picture as the Bank of England sets the scene for their very own 007 Mark Carney to come to Britain's rescue with his magic PPK INFLATION gun, by promising that the Bank of England will keep price stability by aiming to bring the official CPI inflation rate back to 2%, and thus 007 Mark Carney saves Britain from the Spectre of Deflation.
BBC News - "The fear of a deflationary spiral is there, people putting off purchases in the expectation that prices will fall."
Mark Carney - "Enjoy it whilst it lasts because we are going to bring Inflation back to that 2% target"
George Osborne - "Rising wages and falling inflation is good news". So what was it when Inflation was 5%? Was that good news too?
The Real Danger is Not Deflation But Deflation Propaganda
We have had deflation danger warnings for the past 6 years, and even before Lehman's went bust in September 2008 for which the consequences have been CATASTROPHIC for workers, savers and investors. In that it promotes a deflation expectation mindset which is why most people have missed WHOLE INFLATIONARY bull markets such as the stocks bull market of the past SIX YEARS! As deflation fears promote a tendency to expect inflationary bull trends to be unsustainable and hence the constant, crash, collapse headlines virtually every other week thus prompts investors to keep their cash in the banks that steal the purchasing power of deposits whilst workers suffer the inflation consequences of what has come to be known as the cost of living crisis.
Exponential Inflation Mega-trend
Whilst the mainstream press warns of the dangers of deflation and describe how this is bad for the economy as people put off consuming today in the anticipation of lower prices tomorrow. Apparently most of today's 'deflation' is due to falling fuel and food prices, fuel we know is due to the crash in oil prices. But where food is concerned the ONS statisticians need to take a look at the shrinking food content of items sold, which in many cases implies hidden inflation of some 30% over the past decade!
Meanwhile RPI, which is the closest thing to real inflation stayed put at 0.9% and is set against the demand adjusted UK real inflation rate of 1.4%. So deflation? Not really, real UK price Inflation is actually above 1%, and that's before I mention the elephant in the room - HOUSE PRICE INFLATION which is galloping along at 9% per annum, so don't be under any illusion, today's deflation stories are pure economic propaganda.
The gaping hole in the understanding of the deflation / inflation debate is that there are literally £536 billion reasons why there is no real deflation nor will there be deflation, and that is the amount of debt that the 2010-15 government printed over its term in office, debt that will NEVER BE REPAID but rolled over in perpetuity, even the interest due is paid with more printed debt. Which is the primary reason why the UK will never experience sustained deflation because ALL governments print debt to buy votes which causes inflation.
This illustrates that the only answer / solution that all governments have remains one of stealth default by means of high real inflation hence the Inflation Mega-trend. Inflation is a REQUIREMENT for the Debt Based Economy, this is how governments keep putting off the day of reckoning by attempting to inflate the debt away with printed money and then borrowing more money to service the debt interest which is why virtually all money in an economy is debt money that will NEVER be repaid.
Whenever George Osborne or David Cameron are stating that they are paying down Britain's debt, they are LYING! The same went for Ed Milliband when he would stat that Labour would cut Britain's debt. NO GOVERNMENT DEBT IS BEING REPAID OR WILL EVER BE REPAID! Instead the truth is that the WHOLE of the economic growth (in real terms) since the May 2010 General Election and continuing into the May 2015 will be wholly as a consequence of some £536 billion of additional DEBT. Again this is a very important point to note that virtually ALL of the economic growth of this parliament is DEBT based, ALL of it, including the current election boom, the debt accrued over the 5 year term will equate to total real terms increase in GDP - virtually pound for pound which is why there is a cost of living crisis because printing money (debt) does not increase productivity, all it does is inflate the money supply.
This illustrates the reason for the real inflation truth that is far removed from that which the media focuses upon with the annual percentage rates of inflation that masks the truth of what is an exponential inflation mega-trend which is the primary consequences of perpetual money and debt printing monetization programmes that the government is engaged in, in an attempt to buy votes through high deficit spending, an inflation trend that asset prices are leveraged to and oscillate around to what amounts to an exponential trend.
New Conservative Government Debt Fantasy
Just as the Coalition government ended up borrowing over £200 billion more than it forecast it would so we can also take the new Conservative governments pledge / promise / forecast / hopes / dream to turn today's £90 billion annual deficit into a fantasy land £5 and £7 billion surpluses in their last 2 years in office, that is just not going to happen!
- 2014-15 : £90.2bn
- 2015-16 : £75.3bn
- 2016-17 : £39.4bn
- 2017-18 : £12.8bn
- 2018-19 : £5.2bn surplus
- 2019-20 : £7bn surplus
Therefore instead of borrowing £115 billion over the next 5 years, I would not be surprised if the so called economic austerity Conservative government actually ends up borrowing TRIPLE the amount i.e. the actual amount borrowed will be closer to £350 billion rather than propaganda of £115 billion.
My forecast conclusion is for the Conservative government to again borrow at least £200 billion more than the OBR is forecasting today i.e. At least +£315 billion by March 2020 as illustrated by the graph with the risk that borrowing could turn out to be as high as +£350 billion which is set against the OBR/ governments forecast of just +£115bn.
The bottom line is that the Inflation mega-trend is exponential and the politicians, central banks and their vested interest academics deflation fears amount to nothing more than economic propaganda so as to allow governments to print debt (money) to buy votes in the run up to elections which ultimately means that a year from now CPI Inflation will back well above 2% as the Bank of England will use the current cover of deflation to print more money to monetize UK government debt through a myriad of schemes that effectively amount to theft of purchasing power of currency because it is governments printing debt that CAUSES Inflation.
UK Inflation Forecast
My view as of March 2015 is that UK CPI Inflation data for Jan 2016 will be at least 1.5%, with RPI approaching 2.5%. (25 Mar 2015 - Zero UK CPI Inflation Rate Prompts Deflation Danger Propaganda For Fresh Money Printing). So today's -0.1% deflation is very temporary, a flash in the pan, and today's deflation warnings in the mainstream press a year from now will be replaced with warnings of run away inflation as I expect UK CPI inflation to start taking off to well above 2% by May 2016.
Interest Rates 2016
So savers today don't be fooled by temporary deflation to enter into multi-year fixed rates of typically under 2%, as less than a year from now inflation will have roared back to well above 2% and so likely will the best fixed savings rates typically rise to at least CPI+0.5%. Which I will come back to in greater detail so ensure you are subscribed to my always FREE newsletter to get this analysis in your email in box.
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By Nadeem Walayat
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Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of five ebook's in the The Inflation Mega-Trend and Stocks Stealth Bull Market series that can be downloaded for Free.
Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 1000 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk
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