There are two types of inflation, ‘headline’ and ‘core’. Put simply headline inflation takes into account everything, petrol prices, the cost of food etc. it’s cosidered volatile (lots of up and down) and therefore is not used for economic forecasting. Core inflation however is used all the time, because it is considered more consistent and measurable.
So let’s take a look at things that might cause inflation? Well, for a start the US plan for a $700 billion bailout is going to cause inflation, the cost will effectively be $2,300 for every man woman and child alive in the USA. That is quite a consideration, and it is coming directly from tax money, the question I would have as an American would be ‘Why will I give $2,300 dollars to banks who didn’t and likely never will repay me?’, adopt an underwriting approach to it and yo would quickly give it the stamp of ‘failed application’. However, the coffer strings are not controlled by the public, rather the Hillbilly King (a.k.a. George Bush) will push the magic button creating loads of extra zero’s that the public will have to pay back some day.
This intervention (if it happens) will devalue the dollar and send gold and oil shooting up, expensive oil will cause agflation/agriflation which we saw earlier in the year and in general we will be in a decreasing market with inflation still holding on tight, that is called ‘stagflation’, it is considered the dirties slut of financial downturns and guess what? You just woke up beside it (more on that later)
Many of you know I am no fan of bail outs, yesterday’s protest outside the Dail is testament to that, yet on some level I feel that the Rubicon of moral hazard must be crossed or face a total smackdown (you don’t hear that word too often in finance!). The hard part is that nobody knows what would happen, one side is saying ‘we can’t risk the outcome’ and to be fair it would be a scary roller-coaster ride to be on. The other says you can’t afford the intervention ‘or you’ll bankrupt the nation’ and that is also a scary roller-coaster, they argue that you have to take the pain now and get better later. Who knows what the answer is, in any case I know that the USA is in a hard place and that they will have to return to traditional American values to get back. What are those values? The value of one of the best work ethics in the world, the value of saving, the value of frugality, these are all things which I have watched dissappear from American society but I hope to see them come back.
Now over to Ireland, how might we be causing inflation? Erm…. jeez, sorry, I pandered there for 6 nano-seconds to contemplate. Well, the way we will have some nice inflation is by the government lacking any backbone, its hard to believe but our politicians don’t like to say ‘no’. I am going to join them in that and become a ‘yes’ man, I’ll say ‘yes’ to every political party other than them. The point I was getting to is the national wage agreements.
I don’t begrudge anybody their living, not even criminals, it is part of life, and for those that make the wrong decisions (such as muggers) we have jails (politicians get permanent dispensation on that one it seems). Anyway, 6% of an increase in wages for people who are already in the most protected jobs is lunatic behavior. The public sector is already an over bloated mechanism and the sad fact is that we need to chop alot of the fat off that particular pig in order for it to survive, the answer is NOT to give sweeping raises. Going into a downturn giving people more money ’embeds’ the inflation, so now we’ll likely never get it back out unless it is due to extreme hardship.
These lessons were learnt before, in the 1970’s when unions in the US organised raises for their workers to counter inflation, the end result was disaster and rates along the lines of 20% in the early 80’s. The truth is that we need to hamper demand by cutting back money supply, but that doesn’t win votes or friends and it requires a mercenary streak that the Brian’s lack. Too bad for them.
Perhaps we should ask our politicians to go do a job that you can easily be fired from with no pension? In any case the national wage agreement will bring more inflation and it will be o.k. for the unionised folks, but for the rest of us, the private sector (who bankroll the public sector) we’ll go broke, and when we do the money won’t be in the state coffers to give you your 6%, and in any case we’ll take that 6% straight back because taxes will have to be raised to pay the welfare bill of all the people who were made unemployed. Enjoy your 6% in 11 months time, I’ll be having that back shortly.