Inflation Part 2

[Flynnwood]

It's been around ten months since I posed this question on Inflation.
Here
That generated 16 pages of talk.

Fast forward to now (excluding June), the ONS states that interest on Gov debt (loans to be repaid by the taxpayer), have totalled 14.7 Billion pounds in interest payments so far this year.
The (Central Bank of England) is owned by the Government.
The owners of the assets - oil/wood/gas/coal/whatever have driven the inflation (because they can) and which Government have no control over. That's clear.

The Central Banks recourse is to try and hold it back with increasing interest rates.
What am I missing - the Central Bank of England (owned by Gov), prints money, then pays future taxpayers money to service the debt by way of interest, determined at a rate by the Central Bank?

 

[julianf]

The rising of interest rates is a very old school way of dealing with inflation by limiting demand in the classic and simplistic supply / demand / market equilibrium price setup.

At present the inflationary pressures are not internal to our own system but external to it. Our interest rate is going to have zero influence on the word price of Brent crude.


Government debt is a level of insanity that is only really present as the average Joe on the street just considers it beyond their comprehension.


You have a situation where a government does not raise enough tax revenue to run society in a reasonable way.

So they borrow money.

But, from whom?

The answer is, from society itself, in the form of government bonds, bought up by everyone from banks to pension funds etc.

And then interest is paid on those bonds for ever after.


Basically it's nothing more than a wealth redistribution system.

 

[RobinBHM]

The UK has a stagnant economy and we are hearing about tax cuts to solve cost of living crisis…..that means more borrowing or cutting public services.

My prediction is the next 2 years will be dire

 

[ajs]

The Central Banks recourse is to try and hold it back with increasing interest rates.
What am I missing - the Central Bank of England (owned by Gov), prints money, then pays future taxpayers money to service the debt by way of interest, determined at a rate by the Central Bank?

The Bank of England have very limited scope to vary the interest rate paid by HM Government. In ordinary cricumstances (the absence of quantative easing, aka print money) they have none at all in fact.

When the government wants to raise money they go to the bond market where they actually have special status as a particularly safe investment. Each bond is nominally for £100, they will be for the term and interest specified by the particular bond issue. Interest is paid each year and at the end of the term you get the nominal amount back.

So if you e.g. have a ten year bond at 5% you get paid £5 interest every year until the tenth when you get £100 on top to settle the debt. That's contractual, what the BoE do in the meantime is irrelevant.

What that doesn't tell you is how much the Treasury raises in the first place. They are auctioned off and bought by insurers, pension companies and so on. In the case of our 5% bond that is well in advance of anything you can get elsewhere at the minute so it will sell for more than its nominal value, say £120. If it was a 0.5% bond you would find it goes for less, perhaps £75, to reflect the "lost" interest over its term.

 

[Trainee neophyte]

It's all fun and games until the exponential growth stops. We may well be in the crack - up boom phase, so things may become interesting. However, the USA has managed to convince all of Europe to turn off their economy, so that would probably be deflationary? Germany posted a trade deficit for the first time in 30 something years - quite bizarre given that it is entirely by choice.

Meanwhile, the BRICS are looking to create a new reserve currency based on real assets (gold, oil, titanium etc) and this would be the financial equivalent of garlic and sunshine to the fiat vampire money. Unfortunately the west doesn't have much in the way of real assets, but they do have lots and lots of debt, which is currently considered an asset. That may not continue indefinitely.

If a new reserve currency comes into being, and is accepted by the world, then the old reserve currencies will no longer be needed. This means that no one will want to hold dollars, yen, euros or (to the small extent it is still required) Sterling. All that currency held by other countries will be surplus to requirements, so will go to the only people who want it: the originating countries. Lots and lots of inflation as the unwanted money comes home and spills into the economy. .

The good news is that the usa will have to live within its budget, so no more endless war. We in the west will all be much, much poorer but the third world may be less dead, provided we can convince the lunatics in charge to give up gracefully rather than knock over the board in a fit of pique. NATO's last hurrah is currently in play, and it's not going according to plan.

Worth remembering that the "West" makes up about 20% of the world's population, but has successfully stolen the other 80 per cent 's wealth for the last 500 years. Hopefully the rest of the world will be nicer to us than we were to them, in the next phase of the planetary soap opera.

As per BTO: you ain't seen nothing yet.

 

[artie]

I don't think the Government owns the bank of England?

 

[Phil Pascoe]

The UK has a stagnant economy and we are hearing about tax cuts to solve cost of living crisis…..that means more borrowing or cutting public services.

My prediction is the next 2 years will be dire

Half the Country's had a free two years. of course they'll be dire.

 

[RobinBHM]

Half the Country's had a free two years. of course they'll be dire.

aside from the fact your figures are wrong, furlough has no real short term impact on inflation.

 

[Spectric]

What is happening is just like a financial earthquake but instead of techtonic plates causing friction it is the so called big economies causing the problems as some try to push the others into a new pecking order which places like America are trying to resist.

Worth remembering that the "West" makes up about 20% of the world's population, but has successfully stolen the other 80 per cent 's wealth for the last 500 years. Hopefully the rest of the world will be nicer to us than we were to them, in the next phase of the planetary soap opera.

what goes around comes around, so the east is now rising to take it's true place on the world stage and the yen will replace the dollar at some point , as for the UK it is trying to punch way above it's weight and will have to shuffle into a new position.

However, the USA has managed to convince all of Europe to turn off their economy

but they are not capable of filling the demand left by saying no to russian oil and gas so the problems are long term and with no easy fix.

 

[Jameshow]

What is happening is just like a financial earthquake but instead of techtonic plates causing friction it is the so called big economies causing the problems as some try to push the others into a new pecking order which places like America are trying to resist.


what goes around comes around, so the east is now rising to take it's true place on the world stage and the yen will replace the dollar at some point , as for the UK it is trying to punch way above it's weight and will have to shuffle into a new position.


but they are not capable of filling the demand left by saying no to russian oil and gas so the problems are long term and with no easy fix.

But if they have an increase in wealth and earning which cause the cheap goods they produce to become uneconomic after shipping, Europe and the USA will again become competitive for manufacturing???

We are less and less reliant on gas and oil and Europe / USA should follow our lead...

 

[danst96]

It's all fun and games until the exponential growth stops. We may well be in the crack - up boom phase, so things may become interesting. However, the USA has managed to convince all of Europe to turn off their economy, so that would probably be deflationary? Germany posted a trade deficit for the first time in 30 something years - quite bizarre given that it is entirely by choice.

Meanwhile, the BRICS are looking to create a new reserve currency based on real assets (gold, oil, titanium etc) and this would be the financial equivalent of garlic and sunshine to the fiat vampire money. Unfortunately the west doesn't have much in the way of real assets, but they do have lots and lots of debt, which is currently considered an asset. That may not continue indefinitely.

If a new reserve currency comes into being, and is accepted by the world, then the old reserve currencies will no longer be needed. This means that no one will want to hold dollars, yen, euros or (to the small extent it is still required) Sterling. All that currency held by other countries will be surplus to requirements, so will go to the only people who want it: the originating countries. Lots and lots of inflation as the unwanted money comes home and spills into the economy. .

The good news is that the usa will have to live within its budget, so no more endless war. We in the west will all be much, much poorer but the third world may be less dead, provided we can convince the lunatics in charge to give up gracefully rather than knock over the board in a fit of pique. NATO's last hurrah is currently in play, and it's not going according to plan.

Worth remembering that the "West" makes up about 20% of the world's population, but has successfully stolen the other 80 per cent 's wealth for the last 500 years. Hopefully the rest of the world will be nicer to us than we were to them, in the next phase of the planetary soap opera.

As per BTO: you ain't seen nothing yet.

Yeh that's a load of bull. None of that will or can happen because of one thing: geopolitics.

If you have one country controlling everything maybe that could happen but that's not ever going to happen either so, nothing but delusion

 

[heimlaga]

As far as I can see the inflation seems to largely stem from three sources:

1. Big finance producing money from thin air. In the past most currencies had a silver standard or a copper standard or a gold standard. Though various greedy rulers tended to dilute the precious metal content in the coins creating some inflation and though the exploitation of new mines could throw the standard off at least locally there was still some sort of standard. In later times money was printed by central banks without standard but the issuing of new money was still in most cases approximately in ballance with the growt in produced goods and other real value items. From the 1980-ies and onwards this has collapsed as the finance market was allowed to make money out of thin air. This abstract newly made money had to be "laundered" somehow to turn it into real assets and the best way was to lend it out. Both to states and businesses and individuals. All while the rich and big finance put pressure on states worldwide playing them againt one another to lower the taxes on the rich. This minus in the government coffers had to be filled with loans of newly made abstract money from big business.
At one point such a bubble is bound to burst. Because material wealth to equal the worth of the money was never made.
I just hope we can let the air out of the economy as a hissing leak and not as a big bang.

2. Russia has for a long time built military strenght while increasing control over it's citizens and concentrating all wealth and power to the group in charge. This has been going on for some 15 years. It is possible because the mayority of the Russuian people live in a state of learned helplessness and obediance. Because for 500 year anyone trying to take an initiative has been killed or put in prison camp. Ivan the Russian has lerned to shut up and be adaptable and not think too much and believe at least superficially in the leaders.
This is exploited by the czar and oligarchs in charge. However such a concentration of wealth and power can only be carried to a certain point within the borders. Beyond that point the country must either self isolate like North Korea or find wealth and power for it's leaders outside it's borders. Self isolating all of Russia would be hard so wars of conquest is the way to go. The moscovite empire has functioned like that all since the time of czar Ivan the Terrible and apparently nothing has changed under czar Vladimir. Also democrazy coming too close is always a threat to such rulers and therefore the pupular drive for democracy in Ukraine as well as the democracy in Norway, Finland, Estonia, Latvia and Lithuania are most likely percieved as threats to the empire. Deomocratic ideas may leak across the border.
This time set bomb was bound to blow and now it did. The west has to choose between arming and supplying Ukraine and strenghtening Nato's defences at all costs or accept that Russia conquers one country after another making the new lands integral parts of the empire through mass murders and concentration camps.
War and uncertainity and always drive up inflation. Especially when you have ended up opposing a counry rich in energy and natural resources. The Russian cleptocracy knows this and will certainly exploit it to extend their power. However if we let them get what they want in the spirit of Neville Chamberlain we will in a few decades end up fighting a last stand against Russian troops in Denmark...... or at the English channel....... or in Ireland......

3. Globalization and just in time delivery and the extreme slimming of supply lines is bound to make them too long and thin to function at some point. Just like a sailboat's hull is bound to break one day if you sand it thinner after every race to make the boat even faster.

Now all theese three failiours coincide and we are in the thick of it.
Hang on and make do and mend! Remember to help friends and neighbours who are worse off. We can pull through together!

 

[Sean33]

It's been around ten months since I posed this question on Inflation.
Here
That generated 16 pages of talk.

Fast forward to now (excluding June), the ONS states that interest on Gov debt (loans to be repaid by the taxpayer), have totalled 14.7 Billion pounds in interest payments so far this year.
The (Central Bank of England) is owned by the Government.
The owners of the assets - oil/wood/gas/coal/whatever have driven the inflation (because they can) and which Government have no control over. That's clear.

The Central Banks recourse is to try and hold it back with increasing interest rates.
What am I missing - the Central Bank of England (owned by Gov), prints money, then pays future taxpayers money to service the debt by way of interest, determined at a rate by the Central Bank?

Unfortunately as ever a proportion of the blame can and should be put at the central banks doors. Unfortunately most certainly in the UK and I would suggest the west has inept heads of central banks. That being said we have been in unprecedented times with Covid, but as restrictions were lifted you would have to have been in cloud cuckoo land to not see inflation picking up rapidly. They have been completely behind the curve as ever.
An important point to note here in there defence is all data is historic, and they can only estimate the future of inflation, wages, employment etc etc using models with varying scales of data
Now throw in climate change, the Wests agreement to change from fossil to renewable by what is considered by many to be a hugely aggressive time scale and you throw another spanner in the works.
Finally you have a megalomaniac sitting in the Kremlin whose economy is primarily reliant on natural resources and to a lesser extent other vital commodities.
Now you have European governments shutting down there nuclear plants, coal fired stations etc and hence a I would suggest minimum 5 year over reliance on imported gas and oil to keep the lights on.
Now, Mr Putin has a perfect opportunity to take Ukraine. He thinks/knows the West will not retaliate with war but with embargo’s and restrictions. He also knows oil, gas and the other commodities that Russia and Ukraine supply the world will soar and the world needs them, can’t do without them, even when the west employs restrictions/embargo’s there is still a huge swath of the world that hasn’t signed up to said embargo’s and climate change allowing them to sell at a big discount (circa 20%) to fill the void exporting to the West at much higher prices and hence paying for his war.
Now back to inflation, all the major commodities except gas have started to move lower, oil although not yet seen at the pumps has fallen over £20 pb from its high, container costs over 25% lower and if you believe the forward rates predicted 2-3 rate cuts in 2023 in the US.
That being said it already is tough and as others have said unfortunately it looks like another couple of years of the same.

 

[Trainee neophyte]

Yeh that's a load of bull. None of that will or can happen because of one thing: geopolitics.

Could you expound on "geopolitics" for me, please? I have the following definition:

geopolitics

jē″ō-pŏl′ĭ-tĭks

noun​

1. The study of the relationship among politics and geography, demography, and economics, especially with respect to the foreign policy of a nation.
2. A governmental policy employing geopolitics.
3. A Nazi doctrine holding that the geographic, economic, and political needs of Germany justified its invasion and seizure of other lands.

The American Heritage® Dictionary of the English Language, 5th Edition.

Point 3 is interesting - would that be what you are referring to? Will the reserve currency nations go to war to try to save their reserve currency exceptionalism?