Friday 11 June 2010

"That is the only thing that stands between us and Zimbabwe, I mean, it really is as simple as that"

The title of this post is a quote from the very end of this interview with Edmund Conway, economics editor at The Telegraph. I have chosen that quote as the title of this post because I have been saying as much for some time, but at this point in time it is now painfully true and perilously close to becoming reality rather than concern.

If market participants, and people living and operating within the UK economy generally, begin to realise this perilous weakness in our currency and economy en-masse and confidence begins to vapourise, then things could get very, very ugly, very, very quickly. If people start to seriously think inflation is taking off, they will rush to get rid of Pounds to exchange them for something, anything, that they perceive to be a better store of value. This is exactly what happened in Zimbabwe, Weimar Germany, Argentina, Russia, Brazil, and all those many other places that have experienced economic collapse and hyperinflation over the course of history. You will read people saying that deflation is the overriding concern and hyperinflation is impossible as a result. However, hyperinflations always have happened within weak economic environments, when confidence disappears; to say that they cannot happen in a weak and deflationary economic environment is just nonsense — that is precisely when they do happen.

We are on the very edge of the abyss right now, with inflation threatening to seriously gain traction and take off over the coming years, while the Bank of England is stuck in a political box attempting to fight deflationary forces that demand interest rates be kept artificially low. The inflation we are seeing is due to the globally-set prices of commodities that form the basis of every economy, combined with weak confidence in the Pound internationally that has already significantly depressed its value. Meanwhile, the deflationary forces being fought are domestic, due to weak internal demand in our local economy and a lack of external demand for export products, since we do not manufacture very much and what we do is not in great demand elsewhere in the world.

Caveat custodis.

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