THUS Magazine

Writing in today’s Financial Times, often-controversial hedge fund manager Crispin Odey echoes some of the arguments put forward on THUS by Chris Gilchrist (below). 

With full attribution and respect for the FT’s copyright, here is a brief extract from his piece:

The world’s total outstanding debts have to be reduced. Our populations and companies need the means and the time to pay them off. These means are profits and pay rises. The other thing we need is inflation.   

Inflation will allow debt to reduce day by day. Price rises will make companies going concerns, earning their way back to profit. Pay rises will enable households and consumers to pay down what they owe while saving more and spending some. And inflation allows interest rates to rise but still remain negative in real terms. It is healthier that people receive an annual pay rise than take out an extra annual loan – as they have been doing since 2000. This package will allow markets to breathe again.

Inflation is coming in any case as a by-product of today’s world-wide policy intervention. If it comes by force through currency and debt dislocation, then it may come as hyper-inflation at terrible social cost. But it is not useful to see hyper-inflation and deflation as opposite ends of the spectrum. They sit too close to each other on the circle.

Both kill economies and businesses. Our aim must be to achieve an inflationary world until the debt comes down, choosing the right target for the times. The responsible choice is to opt for managed change, to deal with the pain inflation will inflict, at its acutest in the first years, and to fix an exit strategy. We should choose to take this path, set a softer inflation target rate and use forms of quantitative easing, with fiscal action to encourage wage rises.

To fight inflation is to fight the last war. In a modern monetary economy the mortal enemy is deflation, and the absence of growth, profits, and wage increases.

You can read the full article: here: Insight: Debt’s burden on the economy.

This is a very valid debate, and I’m pleased we were among the first to air it, but for the record, I don’t agree with either Crispin or Chris. I sense that inflation will be rehabilitated at G20. A degree of inflation will reduce the debt burden, and thus, if wages rise ahead of inflation, the economy will grow and the debt burden, in real terms, will diminish (though inflation will also apply to the credit card providers and bank lenders, who automatically apply interest rates of an order of magnitude greater than inflation, which has historically had a habit of spiralling out of control in bad times, with disastrous consequences. Neither article has addressed what happens if consumer prices rise ahead of earnings. In the 1970s, for example, the VAT regime was far less pervasive: income taxes may have been higher, but taxes on discretionary spending, or even necessary spending, were less. Consumers were not burdened by mobile phones, television subsriptions and internet bills, items which have acquired the status of de facto essentials. Likewise usurious utility bills, the regulation of which the government appears to exercise little or no control.  In the 1970s the profits from state-operated utilities went back into the state coffers. Now they go via France, Germany or wherever and are paid as dividends to institutional investors. Another consideration is that in the 1970s Britain was predominantly self-sufficient in fossil fuels. 

The inflation argument is absolutely relevant and I want to hear more from people who know a lot more about this than I do – which isn’t hard. So please enlighten us.

John J Kelly