UK Stagflation Risk As Inflation Hits 3.1% and House Prices Fall

goldcore

By Gold Core

2 January 2018

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It was just two years ago that Mark Carney was writing his fourth letter to the British Chancellor, explaining why the country was in a deflationary slump. Even then households were feeling the pinch, despite what officials reported.

Since then Brits have become increasingly vindicated as inflation figures have begun to show what they have all known for some time – prices and the cost of living is on the rise.

Now Mark Carney is forced to write a different type of letter to the Chancellor, one where he will have to explain why inflation is above target at 3.1%. The jump to over 3% in the year to November is the fastest paced increase seen in nearly six years.

Carney’s dilemma

The Governor of the Bank of England now finds himself in a bit of a quandary.

Usually a central bank would increase interest rates in order to combat inflation. Currently the UK’s stands at the punishingly low 0.5% so one would think that there is plenty of room for manoeuvre.

However, debt levels in the UK are massive – at every strata of society – and increase rate rises will lead to a recession or indeed a depression. There is also the not inconsequential matter of Brexit.

Brexit is now seemingly more important than the spending and saving power of Britain’s households and must be considered when looking at a rate hike. When rates were raised last month (the first time in a decade) it was done with the Bank of England’s acknowledgement that Brexit was likely to hurt the country’s growth prospects. So the MPC erred on the side of caution.

With the Brexit cloud growing ever darker and uncertain, the Committee are aware of the need to keep consumer spending, the engine of the UK economy, pumping along. However, if inflation is not ‘handled’ then too much inflation could threaten the central bank’s grip on the economy. Too much inflation could result in total engine failure.

This is Carney’s dilemma.

No dilemma for households?

For savers, pensioners, businesses and households the situation should really be a no brainer. Household bills for food and non-alcoholic drinks are now up by a punishing 4.1% in the last year.

And that discounts the stealth inflation that is taking place in the UK and internationally in the form of shrinkflation. Shrinkflation in the UK is very real with real inflation much higher than reported and realised as consumer items, especially food, shrink in size while prices remain the same or go higher.

Savers, pensioners and households are likely tearing their hair out as economists rush to point to airfares and computer games as the main causes of increasing inflation figures. This is of little consequence to a household pushed to its limits when it comes to feeding and clothing a family.

A flight to Malaga or the next Grand Theft auto is likely the last things on parents’ minds.

The squeeze is so tight that many households have been forced into credit card spending and other forms of borrowing. This has been ‘manageable’ so far as deals offered by credit companies often mean no payments for a set period, free transfers and interest rates make little difference to borrowing costs.

The primary way to combat inflation is to hike interest rates. This will be good if it brings down household debt in the long term but painful as it will push up the cost of debt in the short and likely medium term.

UK household debt stands at £1,630.1 billion (£1.63 Trillion)

Currently UK household debt stands at £1,630.1 billion, an increase of 19% in the last five years.

Sadly the latest measure does not include the rise in fuel prices. This is something else households and businesses are feeling the pinch in and must feel frustrated that it is so rarely acknowledged by those deciding the fate of finances.

The RAC have today warned that thanks to the shutdown of a major North Sea pipeline could push fuel prices up by a further 3p. This will be felt acutely in an economy that saw fuel and raw material bills for manufacturers up 7.3% in November, up from 4.8% in October, while factory gate prices rose by 3%, up from 2.8% in October.

Those who actually live, spend and want to live in the black have a terrible dilemma on their hands. Inflation is killing them, debt is helping them to get by but the solution to both is going to be crippling.

No savings and situation set to worsen 

Sadly there is currently little incentive to save. Wages are not keeping pace with inflation and the latter just eats away at cash in the bank. UK savings are at their lowest in fifty years.

Latest readings show weekly wage inflation is just at 2.2%. For those recalling inflation levels of the 70s and 80s and are currently scoffing at an inflation reading of 3.1% it would be worth reminding you that back then wage inflation was actually outpacing the CPI.

30-40 years ago the logic that wages would respond to higher prices and outpace them was really happening. Today, this is a fallacy.

The situation is made worse by what is in store for the UK economy. Following the release of the inflation figures many economists were quick to reassure that we were now seeing the peak of inflation.

This is highly doubtful. The Bank of England and ONS are pointing towards the weak post-Brexit pound as argument for inflation levels. In truth, the fall in sterling was just the much needed catalyst inflation needed in order to appear in official readings.

Households, businesses and savers and been feeling inflation long before Brexit was even in our common lexicon.

We have inflation today, as we have for at least the past five years. But along with it we also have shrinkflation and now what appears to be signs of stagflation.

Stagflation occurs when there is persistently high inflation combined with stagnant demand and low employment levels. This is appearing in the UK housing market where prices are down for the second-month in a row and the volume of transactions is falling. Unemployment remains low in the UK but this looks set to change.

Only set to get worse so buy gold

From Brexit to stagflation to debt levels it is tricky to see how Governor Mark Carney can turn this situation around. Whilst he might, just might, be able to pull it out the bag for the sake of appearances the ‘solution’ is unlikely to be one which is beneficial to savers.

The monetary policy  we have fallen victim to is wealth ignorant. It does not create or protect wealth. It eats away at it month by month. It shows little regard to how you spend your money and where you hold your cash. This why investors and savers must diversify their portfolios and own real assets which cannot be devalued by monetary and government policies.

Investments such as gold and silver by their very nature are immune to the effects of inflation, stagflation and the dangerous ideas and experiments of central banks.

This year gold is up by nearly 8% and acting as . Wouldn’t it be nice next time the UK inflation figures are released to consider how your portfolio has done in real terms thanks to precious metals?

 

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This article was originally published at Gold Core.

2018-02-23T23:15:16+00:00

daily-reckoning

By Brian Maher

from Daily Reckoning

1 January 2018

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Dear Reader,

Will 2018 be the year central banks start buying cryptocurrencies?

A scandalous proposition, until recently unthinkable — and officially denied at present.

Are not central banks the sworn enemies of cryptocurrencies?

But our agents report strange murmurings… and illicit rumors begin to swirl…

G7 central banks cannot presently trade cryptocurrencies.

These are the shabby dregs of the financial world. They are unwashed behind the ears… and lack the official aroma of respect.

But that may soon change…

“In 2018, things will be different,” says Eugéne Etsebeth, formerly of the South African Reserve Bank.

“G7 central banks will start buying cryptocurrencies to bolster their foreign reserves,” he affirms, concluding:

“Central bank money will pour into cryptocurrencies.”

Here is a voice not of the bitcoin glee club or the moon-mad fringe… but a former central banker… a totem of the establishment.

Our agents have also forwarded us the following dispatch, by way of Peter Smith, CEO of Blockchain:

I think this year will be the first year we start to see central banks start to hold digital currencies as part of their balance sheet.

Perhaps the rumors have authentic juice in them.

Consider…

The world’s central banks hold currency, gold, bonds, stocks, even IMF special drawing rights (SDRs).

Is bitcoin — which has now attained respectability on the futures market — any less an asset than SDRs?

SDRs, we note, may bulk large in central banks’ deliberations.

Establishment totem Etsebeth:

A turning point for G7 central banks will be when the bitcoin market capitalization exceeds the value of all SDRs that have been created and allocated to members (approximately $291 billion)…

In 2018, G7 central banks will witness bitcoin and other cryptocurrencies becoming the biggest international currency by market capitalization. This event… will make it intuitive to own cryptocurrencies as they become a de-facto investment [of central banks].

At writing, bitcoin’s market cap is $318 billion.

If SDRs’ combined value is $291 billion… has not that turning point already arrived?

Furthermore, one bitcoin currently fetches $16,703.

No stock… no bond… no ounce of gold… no other tradable asset comes within miles of it.

Which leads us to a related reason central banks could adopt cryptocurrencies in 2018…

Depreciating national currencies vis-a-vis cryptocurrencies.

Etsebeth:

Another tipping point will be the realization that the values of G7 currencies are devaluing against cryptocurrencies. The SDR and G7 country currencies will be forced to alter their foreign reserve weightings and eventually include a basket of cryptocurrencies.

Yes, just so.

But now comes your objection:

Cryptocurrencies are beyond all things else… volatile.

Bitcoin can swing — has swung — thousands of dollars in a single day.

“Stable” institutions like central banks cannot abide that whisker-whitening volatility.

Your objection is noted… and your objection is sustained.

But as noted above, bitcoin now trades on the futures market.

And the futures market often wrests order out of chaos.

James Angel of the famed Wharton School of Business:

If history is any guide, organized futures will reduce the wild volatility in bitcoin. Historically, the introduction of futures contracts has generally led to a decrease in the volatility of the underlying asset…

Futures contracts provide efficient means for purely financial players who buy when they perceive the price to be low and sell when they perceive the price to be high. This helps to stabilize market prices.

Also, a functioning futures market will attract heaps of institutional money to bitcoin.

And an expanding bitcoin market brings a stability all its own.

There’s a reason why a Coca-Cola or an Amazon or an Apple doesn’t swing hundreds of dollars per day.

Besides, if central banks add bitcoin to their reserves, powerful people have ways of… looking out for their interests.

According to the New York Post’s John Crudele, phone records from the 2008 financial crisis revealed several calls between Treasury Secretary Hank Paulson and Wall Street banks.

These calls “seemed to coincide nicely with stock market rallies.”

Assume for the moment the Federal Reserve purchases bitcoin next year or beyond.

In the event of a price collapse, might the Treasury secretary privately “suggest” that his Wall Street henchmen buy large amounts of bitcoin futures… as they likely bought S&P futures in 2008?

We speculate, of course.

And let us add that we are no bitcoin drummer.

We merely report the news… connect the dots… and try to make sense of the picture that emerges.

We will gladly take correction if our picture distorts reality.

Of course, central banks’ adoption of cryptocurrencies “will happen in the dark,” returning to our former central banker Mr. Etsebeth.

“Old habits die hard,” he concludes.

And that is precisely why nothing central banks do would surprise us… including buying cryptocurrencies… while denouncing them publicly…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

 

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This article by Brian Maher was originally published at Daily Reckoning.