Thursday 17 December 2009

The inflation-deflation debate

Sheffield-based analyst Nadeem Walayat demonstrates that, apart from a blip a few months ago, the long-term inflationary trend in prices continues. Whether you look at CPI or RPI (the latter includes mortgage costs), household bills are rising.

He also examines the trend in UK public debt, which again seems to be rising unstoppably. The Chancellor has predicted growth for the UK economy, but that growth is more than paid for by borrowing, so overall we will be worse off. Controversially, Walayat suggests that the motive is political: deliberate damage to the economy in order to leave the next (presumably Conservative) government "scorched earth". We must hope that British governments do not really operate so irresponsibly.

Walayat concludes with a look at some commodities that investors may choose as hedges against inflation: energy (natural gas), gold and silver. He offers some technical comments on fund charges and whether the way the fund invests is likely to track the real progress of the commodity's price. He feels that gold and silver funds correlate better with actual prices in these markets, though he warns that theft and fraud are always possible.

But the readers' comments are worth looking at, too. "Raleigh" points to an estimated $6 trillion reduction in the value of US housing, which more than offsets the recent $1 trillion increase in US government borrowing as a result of the banking crisis. His view, if I understand it correctly, is that such net deflation will put a downward pressure on prices and wages.

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